Therefore, it is called risk capital as it bears maximum risk. You will Learn Basics of Accounting in Just 1 Hour, Guaranteed! What is debenture? Answer: GDRs have the following features: Question 8. In the event of liquidation of a company, the assets are utilised first to meet the claims of creditors and preference shareholders but everything left, thereafter, belongs to the equity shareholders. American Depository Receipts (ADRs): The depository receipts issued by the company in the USA are called American Depository Receipts. Corporations and governments can issue debentures. Shares are not convertible to debt or such other structure of the capital. These are explained below: Question 1. (a) (c) Fluctuating capital of the company (d) Loan capital of the company Report a Violation 11. The owner (bearer) of the debenture is entitled to interest simply by holding the bond. 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. 6) Right to Control : Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. It is used more frequently with items like computers and electronic items which become obsolete soon. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. They are the most common source for raising capital. (c) India (d) USA Redeemable Debentures: Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss will not affect the payment of interest on debentures. "What Are Corporate Bonds?" Question 11. A debenture is a type of bond. Debenture holders are creditors of a company. Answer:A debenture is a document or certificate, which is issued under the common seal of the company, acknowledging its debt to the holders at given terms and conditions. Directors are appointed in the Annual General Meeting by majority votes. 3- Shares provide an entitlement towards the dividend rights . A preferred share is a share that enjoys priority in receiving dividends compared to common stock. In weak financial situations, management may consider not paying the dividend to preference shareholders. (b) It facilitates the purchase of goods and services without making immediate payment. Features/Merits 1. Question 5. Restrictive clauses: Bank credit has many restrictive clauses which includes mortgage on companys assets or ineligibility to raise funds from specific sources. An example of a government debenture would be the U.S. Treasury bond (T-bond). These requirements are put into place to ensure that these institutions do not take on . Preferred stocks are hybrid securities that have the characteristics of both bonds and stocks. What is business finance? Another advantage accruing to the investor is that the bonds can be . Presently, in India, all the debentures have the first charge over the assets of the company. Debenture holders have the first right on the asset of the company after repaying the statutory dues and employee payments. These shares are issued to the existing shareholders at a price lower than the price at which it is issued to the public. This article throws light upon the top six characteristics of equity shares. Investors can invest in the shares of any company by buying the shares from the open market or by subscribing to the IPO. Answer: Question 6. Question 12. Answer:(a) Fixed Capital and Working Capital (d). Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. 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. Short Answer Type Questions If an organization wants to expand its inventory level so as to meet expected rise in demand, it may use trade credit. Name zones of the Lessors and Lessees in India. It does not have any flexibility with regard to repayments. What are its advantages and limitations? Maturity: Equity shares provide permanent capital to the company and cannot be redeemed during the life time of the company. Should he invest in equity shares, preference shares, public deposits or debentures? In the stock market, shares and debentures are familiar words when it comes to investment. Suzanne is a content marketer, writer, and fact-checker. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures. Answer:The Lessors. The holders of shares are the owners of a company. Debentures are a debt instrument used by companies and government to issue the loan. Preference shares also have a right to participate in excess profits left after payment being made to equity shares. The difference between Equity shares and Debentures is given below in tabular form: 1. A holder of GDR can convert it into any other security at any time. What is a trade credit? 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. Status. Question 16. Bond: What's the Difference? Top 10 Characteristics or Features of Preference Shares 1. In such cases, the company which issues partially convertible debenture decides the fixed percentage of debenture that may or may not be converted into company stocks. The dividend policy of the company is in practice determined by the directors. (a) Canada (b) China Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. It acknowledges a loan or debt. Dividends for Preference share holders Preference shareholders enjoy a priority over equity shareholders in payment of dividends. Middle term credit sources include loans from banks, public deposits, loans from financial institutions and lease financing. Governments typically issue long-term bondsthose with maturities of longer than 10 years. Equity Shares 2. 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). 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. It can be declared by the directors of the company out of profits only. It provides added service: maintenance and upgrading. of its business. Answer:Global Depository Receipts and American Depository Receipts. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. Issue of Debentures is one of the most common methods of raising the funds available to the company. Identify the source of finance highlighted in the following cases. Here, the risk is that the debt's interest rate paid may not keep up with the rate of inflation. Interest is paid at a fixed rate every year and debentures are known as"fixed cost bearing capital". When debts are issued as debentures, they may be registered to the issuer. Since debentures have no collateral backing, they must rely on the. Answer:Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. The direct method is more consistent with the primary purpose of the statement of cash flows. Hence the companies issuing them enjoy (a) the prestige associated, Interest rate is generally lower compared to others like bank loans and other types of short term financing. Each source has its own merits and demerits. A company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders. Some well-known hybrid financing instruments are preference shares, convertible debentures, warrants, options, etc. Financial Institutions 6. Equity shareholders have a residual claim on the income of a company. Debenture vs. Debenture holders have the right to receive interest against the debt fund given by them. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. Which of the following statements about the method of preparing the statement of cash flows is true? The relative lack of security does not necessarily mean that a debenture is riskier than any other bond. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors. News and information is available . Unless they are redeemable, issuing preference shares will lower the companys gearing. (c) Working capital requirement (d) Lease financing Another category of debenture that is also available that is of lesser-known type is a partially convertible debenture. Working Capital Requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. 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. Internal Sources 10. The contract specifies features of a debt offering, such as the maturity date, the timing of interest or coupon payments, the method of interest calculation, and other features. Copyright 10. Login details for this Free course will be emailed to you. Answer:No business can be started, run or expanded without finance. It never makes lessee the owner of the asset. Corporations and governments commonly use debentures as a way to help raise capital. Higher Order Thinking Skills (HOTS) If he wants control in the company or participation in management of the company, he should invest in equity shares. These are called retained earnings. Preference Shares. Term Loans 8. b. Market Price - This price is decided as per the investment and conversion value of this debt instrument. Do you agree? (a) Produces and distributes the goods or services The issue of preference shares does not restrict the companys borrowing power, at least in the sense that preference share capital is not secured against assets in the business. Explain. Debenture holders would also be considered more senior and take priority over those other types of investments in the case of bankruptcy. (a) Fixed capital requirement (b) Ploughing back of profits Convertible debentures are hybrid financial products with the benefits of both debt and equity. Equity shares are the vital source for raising long-term capital. Debentures may have inflationary risk if the coupon paid does not keep up with the rate of inflation. Answer:Equity shareholders are called the owners of the company. A debenture is essentially a debt instrument that acknowledges a loan to the company and is executed under the common seal of the company. 5) Maturity of the Shares : Equity shares have permanent nature of capital, which has no maturity period. Question 7. 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 The share capital is the companys owned capital, common stock, and total capital, while Debenture is the companys acknowledgment to the debt provider. Question 4. Fixed Deposits: Whats the Difference? This article throws light upon the three main types of long term financing. Specify the objective of I.D.B.I. Financial instruments mean documents that evidence the claims and income or asset as "any contract that gives rise to both a financial asset on one enterprise and a financial liability or equity instrument of another enterprise".
this source has characteristics of both equity shares and debentures