Warrants are not a debenture or equity till the time they are exercised, and equity is purchased. When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. Answer:Equity shareholders are called the owners of the company. Long Answer Type Questions This also means that bond investors should pay careful attention to the creditworthiness of debenture issuers. Answer:A company generally does not distribute all its earnings amongst shareholders in the form of dividend. He charges fees for the services rendered. Debenture holders have the right to receive interest against the debt fund given by them. Preferred stocks have dividend priority over common stock. Presently, in India, all the debentures have the first charge over the assets of the company. What is the difference between internal and external sources of raising funds? Explain. The distribution of income as dividend to equity shareholders is left to the discretion of the Board of Directors of the Company under the Companies Act, 1956. Name the source of finance, which is available in normal course of purchase of goods. Hybrid Security: A hybrid security is a single financial security that combines two or more different financial instruments. Debt Capital 9. When debts are issued as debentures, they may be registered to the issuer. Debentures are good from debenture holders point of view but not for business. Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. Why is equity share capital called Risk Capital? Commercial paper is a short-term, unsecured debt instrument issued by corporations typically for the financing of short-term liabilities. What are its advantages and limitations? Liquidation is the process of winding up a business or a segment of the business by selling off its assets. Question 2. c. All of these statements are true. The owner of the asset is called lessor and the party who uses the assets is called lessee. Page 1. (d) Internal and External Sources. The debentures exhibit the following characteristics: Usually, the debentures are part of a series issued over a particular period of time. In this case, the transfer or trading in these securities must be organized through a clearing facility that alerts the issuer to changes in ownership so that they can pay interest to the correct bondholder. assets of the company can be mortgaged in favor of debenture holders. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Bank lending is still mainly short term, although medium-term lending is quite common these days. c) It is a permanent source of capital and is not redeemed during the lifetime of the company. What are the differences between Equity Shares and Preference Shares? What are public deposits? If this happens, the debenture holder earns a lower yield in comparison. Answer:Commercial Paper: Advantages and Limitations of Commercial Paper Advantages: I. 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. Discuss its merits and demerits. It is the basic distinction between a debenture and a share. Explain. (c) 7. It is issued by the company to the general public. Maturity: Equity shares provide permanent capital to the company and cannot be redeemed during the life time of the company. Bond: What's the Difference? GDR and ADR are similar to each other except: III. Preference shares are not suitable for which kind of investors? 2. Long Answer Type Questions (c) Executives of the company (d) Guardian of the company Firm increases the amount of long-term liabilities raising the amount of interest payments to the lenders. Answer:IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. If he is interested in long term investment, he should invest in equity shares. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders. Shareholders are the Owners of the company. Image Guidelines 4. Answer:Trade Credit: Trade credit is the credit extended by the trader to another to purchase goods and services. What Is a Debenture? 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. II. You will Learn Basics of Accounting in Just 1 Hour, Guaranteed! All these factors need to be paid for their services. These debt instruments pay an interest rate and are redeemable or repayable on a fixed date. Also, preferred stockholders generally do not enjoy voting rights. Lets get acquainted with some of the most common types of debentures: There is a type of debentures where the investors have a right to convert their full debenture holdings into equity shares of the company. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. These investors may find their debt returning less than what is available from other investments paying the current, higher, market rate. No matter how small or large business, it need funds for its day-to-day operations. Answer:Johns investment depends on many factors: Question 2. 5) Maturity of the Shares : Equity shares have permanent nature of capital, which has no maturity period. Credit/default risk The credit risk is the risk that the investors interest and/or capital are not repaid by the borrower. Select chapter you wish to download and its done. Answer:It is not suitable for those investors who want to get a fixed return without failure. The key difference between Shares vs. Debentures is that Shares are the capital that the shareholders in the company own. Example: Receiving 80% of debtors outstanding debt on selling fabric abroad. These shares are issued to the existing shareholders at a price lower than the price at which it is issued to the public. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. Question 13. State various sources of long term funds. 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. There is a type of debentures where the investors have a right to convert their full debenture holdings into equity shares of the company. Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. Net increase in net assets resulting from . 40,00,000 6% preference shares 10,00,000 8% Debentures 30,00,000 80,00,000 The market price of the company's equity share is Rs. Here, the risk is that the debt's interest rate paid may not keep up with the rate of inflation. The Company has now achieved its NFI Forward target for Adjusted EBITDA 2 savings of $67 million (from 2019 levels), and the Free Cash Flow target, both one year earlier than the original target for the end of 2023. Sanjay Borad is the founder & CEO of eFinanceManagement. Shares are the unit of measurement of the share capital of the company. Non-convertible debentures are issued by companies that dont give the option to convert debentures into equity shares. Answer:No business can be started, run or expanded without finance. Non-recourse factoring allows for insurance against bad debts. The control in case of a company rests with the Board of Directors who is elected by the equity shareholders. Most often, it is as redemption from the capital, where the issuer pays a lump sum amount on the maturity of the debt. And do not have any share in the residual profits. Long-term instruments include debentures, bonds, GDRs from foreign investors. Preferred stocks are hybrid securities that have the characteristics of both bonds and stocks. A preference share is also a long-term source of equity finance. Therefore, these may carry relatively higher interest rates than otherwise similar bonds from the same issuer that are backed by collateral. The holders of debentures are creditors for a company, and thus they don't possess any voting rights. All rights reserved. Discuss its pros and cons. Adjusted Net Investment Income (a non-GAAP measure described below) of $5.6 million, or $0.26 per share. He is passionate about keeping and making things simple and easy. Question 2. What Is a Compulsory Convertible Debenture (CCD)? Required fields are marked *. NCERT Solutions Class 11 Business StudiesBusiness Studies Sample Papers, I. From the companys point of view, preference shares are advantageous in the following ways: However, dividend payments on preference shares are not tax deductible in the way that interest payments on debt are. The term Debenture comes from the Latin word "debentur" which means borrow. Debenture is an instrument of loan. Bond: What's the Difference? In contrast to secured bonds, which are backed by collateral, unsecured bonds are relatively riskier since they do not offer any sort of backstop of assets if the issuer defaults: they rely solely on the creditworthiness of the issuer. Answer:Following preferential rights are enjoyed by the preference shareholders: Question 5. Governments typically issue long-term bondsthose with maturities of longer than 10 years. Stocks or shares are issued by the corporates as a mode of raising capital. (a) Share profits earned by the lessor A business cannot function unless adequate funds are made available to it. - 14581311. It contains well written, well thought and well explained computer science and programming articles, quizzes and practice/competitive programming/company interview Questions. It is a hybrid security, neither bond nor stock. 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