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Secretarial Practice Distinguish between the following:

Sources of Corporate Finance · Maharashtra Board STD 12 Commerce / Arts (MSBSHSE - English Medium). 3 questions.

Questions

Distinguish between the following:

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3 questions · self-marked practice — reveal the answer and mark yourself.

Question 14 Marks
Owned Capital and Borrowed Capital
Answer
PointsOwned CapitalBorrowed Capital
1. MeaningIt is that capital that is contributed by shareholders.It is that capital that is borrowed from creditors. It is also known as debt capital.
2. SourcesThis capital is collected by the issue of equity shares and preference shares, ploughing back of profits (ownership securities).It is collected by way of the issue of debentures, fixed deposits, loans from banks/financial institutions, etc. (loan, borrowings).
3. Return on InvestmentThe shareholders get dividends as income on their investment. The rate of dividend is fluctuating, in the case of equity shares but is fixed in the case of preference shares.The debt capital holders get interested as income on their investment. Interest is paid at a fixed rate.
4. StatusThe shareholders are owners of the company.The debt holders are creditors of the company.
5. Voting rightThe equity shareholders enjoy normal voting right at the general meetings.The creditors do not enjoy voting rights at the general meeting.
6. Repayment of Capital RedemptionThe shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of windings up of the company.The creditors get priority over the shareholders in case of return of principal amount at the time of winding up of the company.
7. Charge on assetsThe shareholders do not have any charge on the assets of the company.The secured debenture holders have a change on the assets of the company.
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Question 24 Marks
Shares and Debentures
Answer
PointsSharesDebentures
1. MeaningShare is the smallest unit in the total share capital of the company. It is known as ownership securities.A debenture is an instrument evidencing debt under the seal of the Company. They are also known as creditor ship securities.
2. StatusA holder of shares is the owner of the company. Hence, share capital is owned capital.A holder of debenture is the creditor of the company. Hence, Debenture capital is loan capital or borrowed capital.
3. NatureIt is permanent capital. It is not repaid during the lifetime of the company.It is temporary capital. Generally, it is repaid after a specific period.
4. Voting/RightShareholders being owners enjoy normal voting rights in general meetings and can participate in the management of the company.Debenture holders being creditors, do not have any voting right and can not participate in the management of the company.
5. Return on InvestmentReturn on shares is called a dividend. Equity shareholders receive dividends at a fluctuating rate whereas preference shareholders receive dividends at a fixed rate.Return on debenture is called interest. It is fixed at the time of issue. Interest is paid even when a company has no profit.
6. SecurityShare capital is unsecured capital. No security is offered to the shareholder.Debenture capital being loan capital is secured by creating a charge on Company’s property.
7. Time of IssueShares are issued in the initial stages of the company formation.Debentures are issued at a later stage when the company has properties to offer as security.
8. SuitabilityShares are suitable for long-term finance.Debentures are suitable for medium-term finance.
9. Types Shares are classified into:• Equity shares• PreferenceA debenture is classified as:• Registered Debentures• Bearer Debentures• Secured Debentures• Unsecured Debentures• Redeemable Debentures• Irredeemable Debentures• Convertible Debentures• Non-Convertible Debentures
10. Position on liquidationOn liquidation of a company, shareholders rank last in the list of claimants.Debenture holders being creditors, rank prior to shareholders for repayment on liquidation of the company.
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Question 34 Marks
Equity Shares and Preference Shares
Answer
PointsEquity SharesPreference Shares
1. MeaningShares that are not preference shares are called equity shares i.e. these shares do not have the preferential rights for payment of dividends and repayment of capital.Preferences shares are shares that carry preferential rights as to payment of:• Dividend and• Repayment of capital.
2. Rate of DividendEquity shares are given dividends at a fluctuating rate depending upon the profits of the company.Preference shareholders get dividends at a fixed rate.
3. Voting RightEquity shareholders enjoy normal voting rights. They participate in the management of their company.Preference shareholders do not enjoy normal voting right. They can vote only on matters affecting their interest.
4. Return of CapitalEquity capital can not be returned during the lifetime of the company, (except in case of buyback).A company can issue redeemable preference shares, which can be repaid during the lifetime of the company.
5. Nature of capitalEquity capital is known as ‘Risk Capital’.Preference capital is ‘Safe Capital’ with a stable return.
6. Nature of investorThe investors who are ready to take risks to invest in equity shares.Investors who are cautious about the safety of their investment invest in preference shares.
7. Face ValueThe face value of equity shares is generally ₹ 1/- or ₹ 10/- it is relatively low.The face value of preference shares is relatively higher i.e. ₹ 100/- and so on.
8. Right and bonus issueEquity shareholder is entitled to get bonus and right issue.Preference shareholders are not eligible for bonuses and right issues.
9. Capital appreciationThe market value of equity shares increases with the prosperity of the company. It leads to an increase in the value of shares.The market value of preference shares does not fluctuate, so there is no possibility/cheques of capital appreciation.
10. RiskEquity shares are subject to higher risk.Preference shares are subject to less risk.
11. TypesEquity shares are classified into:• Equity shares with normal voting rights.• Equity shares with differential voting rights.Preference shares are classified as:• Cumulative Preference Shares• Non-Cumulative Preference Shares• Convertible Preference Shares• Non-Convertible Preference Shares• Redeemable Preference Shares• Irredeemable Preference Shares• Participating Preference Shares• Non-Participating Preference Shares
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