Funds required for purchasing current assets is an example of Answer:Public deposits. If he is interested in long term investment, he should invest in equity shares. They are the most common source for raising capital. The coupon rate is determined, which is the rate of interest that the company will pay the debenture holder or investor. Leasing company (lessor) owns the equipment and hires it out to the customers (lessee pays rental income to hire assets). The maturity period of a commercial paper usually ranges from Installment Purchase System, Capital Structure Theory Modigliani and Miller (MM) Approach, Advantages and Disadvantages of Focus Strategy, Advantages and Disadvantages of Cost Leadership Strategy, Advantages and Disadvantages Porters Generic Strategies, Reconciliation of Profit Under Marginal and Absorption Costing. State various sources of long term funds. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Identify the source of finance highlighted in the following cases. assets of the company can be mortgaged in favor of debenture holders. (c) Collects the clients debt or account receivables Debenture holders may face inflationary risk. Here, the risk is that the debt's interest rate paid may not keep up with the rate of inflation. (a) Fixed capital of the company (b) Permanent capital of the company Because of this, irredeemable debentures are also known as perpetual debentures. (a) 2. Account Disable 12. The debentures can be redeemable or irredeemable in nature. Question 24. Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. What are public deposits? Some Treasury bonds trade in the secondary market. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students. As the depositors do not have voting rights, it does not dilute control in the company. Question 1. Equity shareholders have a residual claim on ownership of companys assets. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company. (a) Owners of the company (b) Partners of the company Debentures have certain merits and demerits from business as well as debenture holders point of view. (vb) If f. As a source of finance, retained profit is better than other sources. Signifies preferential rights over the payment of dividend and repayment of capital at the time of liquidation. State the meaning of finance. Equity Shares: Characteristic # 1. It makes funds available without diluting the ownership of business. ABC Ltd. is planning to modernise its plant with latest technology. This date dictates when the company must pay back the debenture holders. Common stock, scrip, owned capital, etc., are the other terms used for Shares. The three main features of a debenture are the interest rate, the credit rating, and the maturity date. Voting Rights 5. (d) 5. 2 per share; the anticipated growth rate in dividends is 5% and the firm has the practice of paying all its earnings in the form of dividend. (b) It facilitates the purchase of goods and services without making immediate payment. Question 1. Long-term instruments include debentures, bonds, GDRs from foreign investors. Internal Sources: Funds generated from within the organization are known as internal sources. In the secondary market through a financial institution or broker, investors can buy and sell previously issued bonds. Secured bonds are backed by some sort of collateral in the form of property, securities, or other assets that can be seized to repay creditors in the event of a default. Type # 1. Here we also discuss the top differences between Shares and Debentures, infographics, and a comparison table. In lieu of these preferential rights, their voting rights are taken i.e. The control in case of a company rests with the Board of Directors who is elected by the equity shareholders. Here, Debentures means a company's debt. Liquidation is the process of winding up a business or a segment of the business by selling off its assets. They have voting rights in the meeting of the company and have a control over the working of the company. Ploughing Back of Profits 4. (c) 7. Some funds are needed immediately. Debentures may also be either convertible or non-convertible into common stock. Prohibited Content 3. Features/Merits 1. What are retained profits? Further, debentures may carry credit risk and default risk. Answer:Following are the main differences between a debenture and a share: Question 4. Convertible Debentures. It has a fixed interest rate with cumulative and non-cumulative features redeemable after a fixed interval, either in installment or lump sum. Each source has its own merits and demerits. The Company reported fourth quarter adjusted net investment income1 of $0.35 per weighted average share and net asset value ("NAV") per share of $13.02, compared to $13.20 on September 30, 2022. Question 1. Write a note on international sources of finance. On the downside, firms are likely to force conversion when it is beneficial to existing shareholders rather than FCD investors. Long Answer Type Questions The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note. The lender can be anyone, including a bank, services provider, or supplier, while liabilities can be mortgages, loans, or IOUs. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Dividends do not have to be paid in a year in which profits are poor, while this is not the case with interest payments on long term debt (loans or debentures). They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares. Trade credit can meet only limited financial needs. Debentures are the company's acknowledgment of the debt borrowed by the particular corporate entity towards the fund provider, i.e., an investor in the form of debt. The normal business operations may be affected if lease is not renewed. It may result in higher payout obligations in case the equipment is not found useful and the lessee chooses for premature termination of the lease contact. (a) It is permanent source of capital and is not redeemed during the life of the co, Identify the source of finance highlighted in the following cases: (i) It refers to that part of profits which is kept as reserves for use in the futu, Identify sources of finance in the following case and also state one merit for each of the following : (a) is a permanent source of capital. A shareholder becomes a part of the company's profits. Answer:The right to use the asset in lieu of specific prepayment for a specific time period. Long Answer Type Questions Answer:Nature of business and speed of sales turnover. A floating rate might be tied to a benchmark such as the yield of the 10-year Treasury bond and will change as the benchmark changes. Question 16. The company's credit rating and ultimately the debenture's credit rating impacts the interest rate that investors will receive. Investors can invest in the shares of any company by buying the shares from the open market or by subscribing to the IPO. It cannot be redeemed during the lifetime of the company. 22. 8. Presently, in India, all the debentures have the first charge over the assets of the company. 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. Image Guidelines 4. Fully convertible debentures give investors a way to participate in the growth of a company while reducing short-term risk. Name any three special financial institutions and state their objectives. Answer:A lease is a contractual agreement, in which the owner of the asset grants the other party the right to use the asset in return for a periodic payment, but retains the title over the property. How will a company's expansion plan that will be financed by debt and equity be affected by it's cash flow Explain in detail the types of debenture a company can issue. Question 1. Investors in such shares hold the right to vote, share profits and claim assets of the company. If the shares are cumulative preference shares, the said dividend may be postponed but will have to pay if the following years financials are good. For example, alternation and modification in assets may not be allowed. A business cannot function unless adequate funds are made available to it. Each component of capital structure has its peculiarities, making it suitable for its situations and circumstances. Answer:A large industrial enterprise can raise capital from the following sources. He also needs to see if he wants to invest for short term or long term. Right to Income 3. The rate of dividend on these shares is not fixed; it depends upon the earnings available after paying dividends on preference shareholders. Question 22. Equity shares are the vital source for raising long-term capital. To safeguard the interest of equity shareholders and enable them maintain their proportional ownership, section 81 of the Companies Act, 1956 provides that whenever a public limited company proposes to increase its subscribed capital by the allotment of further shares, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, whichever is earlier, such shares must be offered to holders of existing equity shares in proportion, as nearly as circumstances admit, to the capital paid up on these shares. What advantage does issue of debentures provide over the issue of equity shares? c. All of these statements are true. He is a Chartered Market Technician (CMT). Equity shares are the main source of long-term finance of a joint stock company. However, the holders of the debenture have the option of holding the loan until maturity and receive the interest payments, or convert the loan into equity shares. Retained earnings are better than other sources of finance because: V. Value Based Questions The preference dividend is also paid out of net profits after taxes, but the only difference is that the dividend is fixed. Answer:Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Explain. State two factors affecting the fixed capital requirement of a firm. They are not secured by collateral, yet they are considered risk-free securities. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures. Question 9. These are a long-term source of finance Dividend payable is generally higher than debenture interest Right on assets when the company is liquidated Par value of preference shares Fixed-rate of dividend irrespective of the volume of profit gained Preemptive right of preference shareholders A company will issue these to raise capital for its growth and operations, and investors can enjoy regular interest payments that are relatively safer investments than a company's equity shares of stock. The main difference between FCDs and most other convertible debentures is that the issuing company can force conversion into equity. View sources of finance.pdf from FINANCE MISC at Amity University. C. On the basis of source of generation 1. ADRs are issued in The dividend yield traditionally offered on preference dividends has been too low to provide an attractive investment compared with the interest yields on loan stock in view of the additional risk involved. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. Foreign Capital. Equity shareholders are the real owners of the company. 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. "What Are Corporate Bonds?" The share capital is the companys owned capital, common stock, and total capital, while Debenture is the companys acknowledgment to the debt provider. For the investor, preference shares are less attractive than loan stock because: Question 6. It is a medium term fund. Debentures represent It is difficult for a newly established company to be able to get funds from public deposits. If the brain only reads the question, it performs one command. Debenture holders are creditors of a company. 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. You may also have a look at the following articles , Your email address will not be published. (c) India (d) USA Page 1. Equity shareholders have a residual claim on the income of a company. New companies need expensive equipments to run the business: office, equipment leasing from larger companies like Apple. You are free to use this image on your website, templates, etc., Please provide us with an attribution link. Why preferences are given to preferential shares? The brain can now formulate the correct answer without noise. An example is equity share capital and preference share capital. 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). It reduces initial capital for (new) businesses. Firm increases the amount of long-term liabilities raising the amount of interest payments to the lenders. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Question 23. Question 4. 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. A debenture is a type of bond or other debt instrument that is unsecured by collateral. In India, securities are defined under The Securities Contracts (Regulations) Act, 1956, in which according to Section 2 (h), securities include "shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate"[1] Because they are not backed by any form of collateral, they are inherently more risky than an otherwise identical note that is secured. (d) 8. Shares so offered to existing shareholders are called Right Shares and their prior right to such is known as pre-emptive right. It does not have any flexibility with regard to repayments. On a normal note, the rights of the debenture holders, trigger date for conversion, the conversion date is already mentioned at the time of issuing debentures. Preference Shares 3. Answer:Short term sources include trade credit, factoring, banks and commercial papers. The holders of shares are the owners of a company. (b) Generated through loans from commercial banks 2. Question 1. Liabilities in financial accounting refer to the amount of money a business owes to the lender. Shareholders have voting right in the annual general meeting of the company. Similar to most bonds, debentures may pay periodic interest payments called coupon payments. However, it is true that the use of retained earnings as a source of funds does not lead to the payment of cash. For an investor (bondholder), owning a debenture is an asset. But there can be no mortgage shares. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Provides good long-term finance without losing control of the business. (c) 9. They represent the ownership of a company and therefore, the capital raised by issue of these shares is called owners funds. These shares are issued to the general public and are non-redeemable in nature. 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Between shares and their prior right to use this image on Your website, templates, etc., the. Rather than FCD investors main difference between FCDs and most other convertible debentures is that the issuing company can conversion... Such shares hold the right to such is known as internal sources: funds generated from the!

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