Example: Receiving 80% of debtors outstanding debt on selling fabric abroad. Right to Income 3. Identify the source of finance highlighted in the following cases. Net increase in net assets resulting from . Which of the following statements about the method of preparing the statement of cash flows is true? Preference Shares vs. Debentures: Whats the Difference? Short Answer Type Questions The corporate tax rate is 50%. Page 2-3. Shareholders do not have any lien on the assets of the company. The finance manager plans to arrange m. For the company, it is mandatory for the company for payment and repayment of interest and debt. Business is concerned with production and distribution of goods and services for the satisfaction of needs of society. (d). Question 13. Question 16. Those who hold the shares of the company are called the shareholders and are owners of the company. Merits of Public Deposits. However, their claims are discharged before the shares of common stockholders at the time of liquidation. 1- Share or Share Capital is a company's owned capital while a Debenture is its obligation to the debt provider or creditor. Question 9. Give reasons for your answer. But, even when the residual income is not distributed to equity shareholders by way of cash dividends, they stand to benefit in future by way of enhanced earning capacity of the company resulting in higher dividends in future as well as capital appreciation. Working Capital Requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. What do you mean by discounting of bills of exchange? It is the conversion ratio multiplied with the market price of each equity share. (vb) If f. As a source of finance, retained profit is better than other sources. Which source has characterised of both equity shares and debenture? Whenever a firm chooses equity to boost funds, the shares of the company are issued to the public, and whoever buys shares gets an opportunity to be part of the company. Image Guidelines 4. It makes its procedure difficult. Gordon Scott has been an active investor and technical analyst or 20+ years. How and Why. The brain can now formulate the correct answer without noise. Question 12. What is a trade credit? What are retained profits? (a) Fixed capital requirement (b) Ploughing back of profits A bearer debenture, in contrast, is not registered with the issuer. T-bonds help finance projects and fund day-to-day governmental operations. Why? The corporate world has its own set of capital structure. These requirements are put into place to ensure that these institutions do not take on . 1,00,000 for investment purposes. Answers: Question 4. "S&P Global Ratings Definitions.". It helps in promoting sales of an organization. In the event of a corporation's bankruptcy, the debenture is paid before common stock shareholders. This article throws light upon the top six characteristics of equity shares. What Is a Compulsory Convertible Debenture (CCD)? Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Business needs to choose right source of finance to make the best use of it. Shares are ownership securities. Here we also discuss the top differences between Shares and Debentures, infographics, and a comparison table. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. Companies dont have to chase up their own debtors. Describe in brief the features of equity shares. Therefore, it is right to say that retained earnings are not a good source from the values point of view as it is the right of equity shareholders. This also means that bond investors should pay careful attention to the creditworthiness of debenture issuers. A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. Status. It does not have any flexibility with regard to repayments. Debentures are unsecured bonds issued by corporations to raise debt capital. (a) Preference shares (b) Commercial paper These are explained below: A short-term loan, for up to three years. - 14581311. S&P Global. The procedure of obtaining deposits is simple and does not contain restrictive conditions. Page 4. In particular, it is an unsecured or non-collateralized debt issued by a firm or other entity and usually refers to such bonds with longer maturities. An example of a government debenture would be the U.S. Treasury bond (T-bond). (b) Providing information to the client on credit worthiness of prospective client. Merits of Trade Credit. But in good times, it is being retained to plough back into the business. In weak financial situations, management may consider not paying the dividend to preference shareholders. Long Term Liabilities, also known as Non-Current Liabilities, refer to a Companys financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. the convertible bonds offer a mixture of the characteristics of the fixed interest and equity shares. The holder of the shares is considered the company owner and enjoys various rights under the statutes. The former will typically invest in loans or convertible debentures to pay the interest on their own borrowings, while the latter will seek equity investments. Voting Rights 5. New companies need expensive equipments to run the business: office, equipment leasing from larger companies like Apple. (d) Transfer the goods from one place to another Shareholders have the residual right at the time of liquidation. Investopedia does not include all offers available in the marketplace. A Computer Science portal for geeks. Therefore, it is called risk capital as it bears maximum risk. Question 25. Here, the risk is that the debt's interest rate paid may not keep up with the rate of inflation. Debentures are the most common form of long-term debt instruments issued by corporations. The use of retained earnings as opposed to new shares or debentures avoids issue costs. Question 5. Equity shares represent the ownership of a company and capital raised by the issue of such shares is known as ownership capital or owner's funds. Question 3. Free PDF download of NCERT Solutions for Class 11 Business Studies Chapter 8 Sources of Business Finance solved by Expert Teachers as per NCERT (CBSE) Book guidelines. What is business finance? However, the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed-rate investments. These are the debt instrumentThese Are The Debt InstrumentDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. These deposits generally carry a rate of interest higher than the deposits in commercial banks. How will a company's expansion plan that will be financed by debt and equity be affected by it's cash flow The pre-emptive right protects equity shareholders by ensuring that management cannot issue additional shares to persons of their choice in order to strengthen their control over the company. Shares are the ownership capital of the company. Debenture holders have the first right on the asset of the company after repaying the statutory dues and employee payments. Next, thecoupon rateis decided, which is the rate of interest that the company will pay the debenture holder or investor. You may also have a look at the following articles , Your email address will not be published. Name the source of finance, which is available in normal course of purchase of goods. A shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. Another factor that may be of importance is the financial and taxation position of the companys shareholders. It is a convenient and continuous source of finance. * Please provide your correct email id. It is issued by the company to the general public. Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. Debt factoring is a financial service that allows a business to raise funds based on the value owed to them by their debtors. They represent the ownership of a company and therefore, the capital raised by issue of these shares is called owners funds. (c) Executives of the company (d) Guardian of the company A preference share is a long term source of finance for a company. All Chapter wise Questions with Solutions to help you to revise complete Syllabus and Score More marks in your examinations. Answer:Short term sources include trade credit, factoring, banks and commercial papers. Inflation measures economy-based price increases. State two factors affecting the fixed capital requirement of a firm. It has a fixed rate of dividend. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, and then finance through retained earnings would be preferred to other methods. 2- When going public to the investors, the issue of shares is compulsory while the issue of debentures is optional. In fact, strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. (b) Short Term Finance and Long Term Finance Trade credit can meet only limited financial needs. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. In many cases, they may not get anything if profits are insufficient; or may get even a higher rate of dividend. Another advantage accruing to the investor is that the bonds can be . Debentures are a common form of unsecured bonds issued by corporations and governments. A debenture is essentially a debt instrument that acknowledges a loan to the company and is executed under the common seal of the company. Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Companies use debentures as fixed-rate loans and pay fixed interest payments. Do you agree with this view? Debt fund are investments, such as a mutual fund, closed-end fund, ETF, or unit investment trust (UTI), that primarily invest in fixed-income instruments like bonds or other types of a debt security for returns. Governments typically issue long-term bondsthose with maturities of longer than 10 years. 2. Ordinary shares are most commonly issued in the market as a means for a company to . Secured and Unsecured, Registered and Bearer, Convertible and Non-Convertible, First and Second are four types of Debentures. Answer: Question 5. Preference shares are preferred by company but not by investors. Hybrid securities, often referred to as "hybrids," generally combine . (a) 3. Answer:Nature of business and speed of sales turnover. Shares cannot be converted into debentures whereas debentures can be converted into shares. Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. Debentures also carryinterest rate risk. Answer:Sources of raising long term and short term finance are shown in the chart given below: Question 3. In lieu of these preferential rights, their voting rights are taken i.e. It is a negotiable instrument and can be traded freely like any other security. Preliminary Contracts are (a) binding on the Company (b) binding on the Company, if ratified after incorporation (c) binding on the Company, after incorporation (d) not binding on the Company Answer Question 2. CFA And Chartered Financial Analyst Are Registered Trademarks Owned By CFA Institute. (c) India (d) USA If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. Answer:Global Depository Receipts (GDRs): GDR is an instrument issued by a company to raise funds in some foreign currency and is listed and traded on a foreign stock It makes funds available without diluting the ownership of business. Each source has its own merits and demerits. Do you agree? This rate can be either fixed or floating and depends on the company'scredit ratingor the bond's credit rating. These are different types of debentures which are also categorized as hybrid financing. Therefore, it is unreasonable to transfer funds to general reserves which are called retained profits if there are exceptionally good profits. Short-term instruments include working capital loans, short-term loans. Question 1. A debenture is thus like a certificate of loan or a loan bond evidencing the company's liability to pay a specified amount with interest. Question 10. Preference Shares 3. (d) Internal Sources and External Sources Internal Sources: Funds generated from within the organization are known as internal sources. Some debentures can convert to equity shares while others cannot. Question 5. Question 18. Write a note on international sources of finance. A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. Convertible debentures are hybrid financial products with the benefits of both debt and equity. In contrast, the company must make the payment and repayment of interest and principal to the debenture holders.. The bank performs three types of functions namely, assistance to other financial institutions, direct assistance to industrial concerns and promotion and coordination of financial technique service. (a) It is permanent source of capital and is not redeemed during the life of the company. NCERT Solutions Class 11 Business StudiesBusiness Studies Sample Papers, I. As a debt instrument, a debenture is a liability for the issuer, who is essentially borrowing money via issuing these securities. Preference shares have the characteristics of both equity shares and debentures. What do you call a person with authority? They are not secured by collateral, yet they are considered risk-free. Stocks or shares are issued by the corporates as a mode of raising capital. It enhances capacity of the business to absorb unexpected losses. They receive dividends or bonuses when the company distributes its profits. State two factors affecting the working capital requirement of a firm. Because these debts are not backed by any collateral, however, they are inherently riskier than secured debts. Short-term instruments include working capital loans, short-term loans.read more that corporates are using to fulfill their capital requirement by giving assets as mortgage/security. Furthermore, for preference shares to be attractive to investors, the level of payment needs to be higher than for interest on debt to compensate for the additional risks. AccountingNotes.net. If an organization wants to expand its inventory level so as to meet expected rise in demand, it may use trade credit. The company's credit rating and ultimately the debenture's credit rating impacts the interest rate that investors will receive. they are not eligible for voting. Answer: They are given some preferences because they are not given voting rights. 1. Multiple Choice Questions Warrants are not a debenture or equity till the time they are exercised, and equity is purchased. Discuss its pros and cons. American Depository Receipts (ADRs): The depository receipts issued by the company in the USA are called American Depository Receipts. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Difference Between Shares and Debentures (wallstreetmojo.com). The non-payment of dividend does not give the preference shareholders the right to appoint a receiver, a right which is normally given to debenture holders. Bond: What's the Difference? Examples are non-convertible debentures, convertible debentures, 2, The share capital is to be disclosed under Shareholders funds on equity and, Debentures are to be disclosed under long term borrowings under. Long-term instruments include debentures, bonds, GDRs from foreign investors. The types are: 1. Top 10 Characteristics or Features of Preference Shares 1. Sanjay Borad is the founder & CEO of eFinanceManagement. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. Name the two Indian companies which have raised money through issue of GDRs. Fixed income refers to assets and securities that bear fixed cash flows for investors, such as fixed rate interest or dividends. Prohibited Content 3. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. Even if the company is left with sufficient profits after meeting all obligations including that of preference shareholders, equity shareholders cannot legally force the company to pay dividends to them. No business can be carried without availability of adequate funds.