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. The investment in equity costs higher than investing in debt. For this reason, they are also called hybrid financing instruments. Preference shares are a long-term source of finance for a company. Preference Shares 3. Preference share experience the perquisites of the dividend distribution first. Ordinary shares are issued to the owners of a company. Debentures. ... a company may raise loans through debentures. The salient features of this […] 4. We have compiled NCERT MCQ Questions for Class 11 Business Studies Chapter 7 Formation of a Company with Answers Pdf free download. By investing in equity, an investor gets an equal portion of ownership in the company, in which he has invested his money. The Companies Act, 1956 has not defined as to what debenture means. These are perpetual (irredeemable) and the company is not required to repay the amount during its life time. It is also named as long term capital or fixed capital. 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. The people who buy shares are referred to as shareholders of the company because they have received ownership interest in the company. Finance is available to a business from a variety of sources both internal and ex ternal. The following are the limitations of Debentures. Difference between Equity Shares and Preference Shares. The companies can raise money through debentures easily compared to equity and preference shares. It is ideal to evaluate each source… 1. 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. Type # 1. #2 Non-convertible debentures 3. Debentures can be transferred from one person to another. Broadly speaking a shareholder will provide equity capital in return for shares (stock) which usually will incorporate voting rights. They represent the ownership of a company and therefore, the capital raised by issue of these shares … #1 Convertible debentures. Debentures 4. The shareholder is the owner of the legal entity and is not entitled to Equity shares are the most important source of raising long term capital by a company. 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. Traditionally, the company used to give option of conversion of shares into stocks i.e. Preference shares have some characteristics of both equity shares and debentures. 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. The equity stockholders get the opportunity to cast their vote in major business decisions. Thus, preference shares have some characteristics of both equity shares and debentures. ADVERTISEMENTS: This article throws light upon the three main types of long term financing. Difference between Debenture vs. Equity Shares. 3. The law treats them as shares but they have elements of both equity shares and debt. 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 (12)].Thus, the Act only states that it is a kind of security which constitutes a charge by way of security on issuing debentures. Investments in these shares are safe, and a preference shareholder also gets dividend regularly. They represent the ownership of a company and therefore, the capital raised by the issue of these shares … Equity share capital is a prerequisite to the creation of a company. It simply states that a “debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not [Sec. •Preference shares do not carry voting rights 7. It plays a major role in deciding the capital structure of the company. The investors get fixed and regular interest, whether the company earns profit or not. Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. 4. For this reason, they are also called ‘hybrid financing instruments’. 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 cannot be converted into equity shares. Long term sources of finance are mostly required for the purchase of fixed assets, such as land, building, machinery, etc. (a) Equity Shares. The long-term sources are: 1. Equity share is an ordinary share. Preference shares have the characteristics of both equity shares and debentures. These instruments, however, have a lot of differences. This is an additional source of long-term finance. Since these stocks are given preference over equity shareholders, they are called preference shareholders. Loans from Financial Institutions and 5. Like a bond, it has a claim on the assets of the company. Equity shares‘cannot be redeemed even if there is a danger of over capitalization. Long term sources of finance refer to the funds, which are required for investment in business for a period exceeding up to five years. They are classified based on time period, ownership and control, and their source of generation. Equity Shares: Equity shares are the most important source of raising long-term capital by a company. 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. Retained Earnings. It is an economical method of raising funds. Generally, debentures and equity shares are the two choices sources of long-term capital for the company. Convertible vs. non-convertible debentures. 7. Preference shares are a long-term source of finance for a company. retail, corporate, investment banking, etc. Equity Shares 2. Equity Shares: It represents the ownership capital of a firm. In finance, Equity refers to the Net Worth of the company. A preference share partakes the characteristics of both the shares and the bonds. It is the owner’s funds which are divided into some shares. The cost of issue of equity share is higher than that of preference shares or debentures. Debentures Debentures are an important instrument for raising long term debt capital. 3. Dev has two projects A and B in hand. 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. Preference shareholders generally do not enjoy any voting rights. Permanent burden of interest 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. Equity is the ownership stake in an entity, while share refers to the proportion of ownership of an individual in a company. Equity Shares: It is the most important sources of finance for fixed capital and it represents the ownership capital of a firm. Both types of capital have different characteristics from a civil law point of view. A public limited company may raise funds from public or promoters as equity share capital by issuing ordinary equity shares. Generally, preference shares resemble equity shares in respect of maturity. 1. 2. It is the source of permanent capital. Source of Fund # 1. 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. STOCKS: Presently, there is nothing called stocks. Preference shares resemble debentures as they bear fixed rate of return. Regular source of income. Financial management chooses the appropriate sources for the acquisition of required funds. Preferred Stock is another long term external sources of finance. Preference Shares 3. Bond and debenture are fixed interest providing debt instruments issued by companies and the government. The different sources available for raising fund are shares, debentures, loan, public deposits etc. Answer: A large industrial enterprise can raise capital from the following sources. Practicing these Formation of a Company Class 11 Business Studies MCQs Questions with Answers really effective to improve your … either equity capital or debt capital. Equity Shares: Equity shares are the most important source of raising long term capital by a company. Debt Capital: Debt capital includes debentures and term loans. Convertible debentures are debentures which are convertible wholly or partly into equity shares after a fixed period of time. The types are: 1. These are also known as preferred stock or preferred shares. Interest-bearing bonds that can be converted from debt into equity shares after a specific period of time. The same amount of risk is involved in both the projects. Debenture holders do not have any voting rights and there is no dilution of ownership. However, bank loans are non-transferable. Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. Franchising. 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. Equity share and Preference share are the two types of share that a company issues. ... Equity Shares also known as ordinary shares, which means, other than preference shares. It has both the features of equity shares and the debt. MCQ Questions for Class 11 Business Studies with Answers were prepared according to the latest question paper pattern. Non Convertible Debentures (NCD): Non-convertible debentures , which are simply regular debentures, cannot be converted into equity shares of the liable company. Ordinary (equity) shares. They are neither completely similar to equity nor equivalent to debt. ; They get the benefit of receiving the dividend even before the equity … Preference shares have the characteristics of both equity shares and debentures. Equity Shares 2. 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? Investors who have a desire for a fixed income have no attraction for equity shares… Ownership •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. (a) Project A (b) Project B (c) Both project A and project B (d) None of the above. Disadvantages of debentures. These sources of funds are used in different situations. 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