However, bank loans are non-transferable. Dev has two projects A and B in hand. Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. The cost of issue of equity share is higher than that of preference shares or debentures. Financial managers properly analyze all available sources and choose one which provides funds at low cost and have fewer conditions attached to them. In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. They represent the ownership of a company and therefore, the capital raised by the issue of these shares … Preference share experience the perquisites of the dividend distribution first. 1. either equity capital or debt capital. Long term sources of finance refer to the funds, which are required for investment in business for a period exceeding up to five years. Preference Shares 3. This is a special feature that corporations take advantage of because it can attract lenders and usually carries a lower interest rate for the issuing company. Loans from Financial Institutions and 5. Equity Shares: It represents the ownership capital of a firm. Generally, preference shares resemble equity shares in respect of maturity. Preference shareholders generally do not enjoy any voting rights. Financial management chooses the appropriate sources for the acquisition of required funds. (a) Equity Shares. Equity Shares 2. Also as the dividend is payable only at the discretion of the directors and only out of profit after tax, to that extent, these resemble equity shares. Debenture holders do not have any voting rights and there is no dilution of ownership. Equity share and Preference share are the two types of share that a company issues. Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue. Ordinary shares are issued to the owners of a company. Equity is the ownership stake in an entity, while share refers to the proportion of ownership of an individual in a company. We have compiled NCERT MCQ Questions for Class 11 Business Studies Chapter 7 Formation of a Company with Answers Pdf free download. Preference shares have some characteristics of both equity shares and debentures. The salient features of this […] It is the source of permanent capital. It has both the features of equity shares and the debt. Equity Shares: Equity shares are the most important source of raising long term capital by a company. Ordinary (equity) shares. Broadly speaking a shareholder will provide equity capital in return for shares (stock) which usually will incorporate voting rights. If the rate of return of project A and B is 20% and 15% respectively, then under normal circumstance, which of the two projects is likely to be selected? Permanent burden of interest Equity shares are the most important source of raising long term capital by a company. Generally, debentures and equity shares are the two choices sources of long-term capital for the company. It is also named as long term capital or fixed capital. Equity shares‘cannot be redeemed even if there is a danger of over capitalization. Thus, preference shares have some characteristics of both equity shares and debentures. Ordinary shares also known as equity shares are a unit of ... Debentures are issued only for a time period and thus the company must pay the amount back to the debenture holders at the end of the agreed period. 2. Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. The law treats them as shares but they have elements of both equity shares and debt. The Companies Act, 1956 has not defined as to what debenture means. Equity Shares: It is the most important sources of finance for fixed capital and it represents the ownership capital of a firm. For this reason, they are also called ‘hybrid financing instruments’. Difference between Debenture vs. Equity Shares. Equity Shares: Equity shares are the most important source of raising long-term capital by a company. Debentures. Debentures can be transferred from one person to another. Disadvantages of debentures. •Preference shares do not carry voting rights 7. Franchising. Investments in these shares are safe, and a preference shareholder also gets dividend regularly. Investors who have a desire for a fixed income have no attraction for equity shares… They cannot be converted into equity shares. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders.
11. 4. Equity share capital is a prerequisite to the creation of a company. •These shares have a higher claim on the assets and earnings of the company than the equity shares • Dividend at a fixed rate is payable on these shares before any dividend is paid on equity shares •Preference shares have the characteristics of both equity shares and debentures. Answer: A large industrial enterprise can raise capital from the following sources. 2 (12)].Thus, the Act only states that it is a kind of security which constitutes a charge by way of security on issuing debentures. retail, corporate, investment banking, etc. It plays a major role in deciding the capital structure of the company. Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. In finance, Equity refers to the Net Worth of the company. Like a bond, it has a claim on the assets of the company. Since these stocks are given preference over equity shareholders, they are called preference shareholders. Convertible debentures are debentures which are convertible wholly or partly into equity shares after a fixed period of time. Preference shares have the characteristics of both equity shares and debentures. 3. The different sources available for raising fund are shares, debentures, loan, public deposits etc. 9. The long-term sources are: 1. It is the owner’s funds which are divided into some shares. The investment in equity costs higher than investing in debt. A preference share partakes the characteristics of both the shares and the bonds. 4. The law treats them as shares but they have elements of both equity shares and debt. The equity stockholders get the opportunity to cast their vote in major business decisions. Debentures 4. The following are the limitations of Debentures. A large industrial enterprise can raise capital from the following sources. The companies can raise money through debentures easily compared to equity and preference shares. A public limited company may raise funds from public or promoters as equity share capital by issuing ordinary equity shares. (a) Project A (b) Project B (c) Both project A and project B (d) None of the above. Security finance includes both shares and debentures. Convertible vs. non-convertible debentures. It is an economical method of raising funds. Both types of capital have different characteristics from a civil law point of view. These are perpetual (irredeemable) and the company is not required to repay the amount during its life time. Preference Shares 3. 3. Practicing these Formation of a Company Class 11 Business Studies MCQs Questions with Answers really effective to improve your … 3. Non Convertible Debentures (NCD): Non-convertible debentures , which are simply regular debentures, cannot be converted into equity shares of the liable company. These sources of funds are used in different situations. ... a company may raise loans through debentures. Preference shares have the characteristics of both equity shares and debentures. Retained Earnings. They represent the ownership of a company and therefore, the capital raised by issue of these shares … In the capital market, both equity and debt instruments, such as equity shares, preference shares, debentures, zero-coupon bonds, secured premium notes and the like are bought and sold, as well as it covers all forms of lending and borrowing. Type # 1. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders. Bond and debenture are fixed interest providing debt instruments issued by companies and the government. ; They get the benefit of receiving the dividend even before the equity … It is ideal to evaluate each source… Preference shares resemble debentures as they bear fixed rate of return. They are neither completely similar to equity nor equivalent to debt. Equity share is an ordinary share. They are classified based on time period, ownership and control, and their source of generation. MCQ Questions for Class 11 Business Studies with Answers were prepared according to the latest question paper pattern. Traditionally, the company used to give option of conversion of shares into stocks i.e. Preference shares are a long-term source of finance for a company. The same amount of risk is involved in both the projects. Finance is available to a business from a variety of sources both internal and ex ternal. There are two types of debentures: Convertible debentures: Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. STOCKS: Presently, there is nothing called stocks. #1 Convertible debentures. The types are: 1. Preference shares are a long-term source of finance for a company. For this reason, they are also called hybrid financing instruments. Long term sources of finance are mostly required for the purchase of fixed assets, such as land, building, machinery, etc. At the time of liquidation of the company, only after the payment of principal to the preference shareholders, the claims of the equity shareholders can be satisfied. ... Equity Shares also known as ordinary shares, which means, other than preference shares. S funds which are divided into some shares equity shares after a period... 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