Business Finance Q. Define Equity
Shares and mention its features.
Ans: - Equity shares are called real owner’s of the
company. As per companies act 1956, equity shares are those which are not preference
shares.
Features
of Equity shares:
i.
Primary
risk-bearers
ii.
Control
over management
iii.
Higher
profits available for equity share holders.
Merits of equity shares:
i.
Permanent source of capital
ii.
No charge over assets
iii.
Huge funds can be raised
Demerits of equity shares:
i.
Risk of fluctuating return.
ii.
Depends on market conditions.
Q. Define Preference
Shares and mention its features.
Ans:
- Preference shares are those which carry a preference over dividend and
return on capital. The dividend rate on preference shares is fixed. The
preference shareholders get the dividend on fixed rate and out of net profits
of a company prior to distribution of dividend on equity shares. Further the
assets remaining after the payment of debts of the company under liquidation
are first appropriated for returning the preference share.
Following
are the basic features of preference share:
i.
Fixed rate of dividend
ii.
Preferential payment of
dividend
iii.
Preferential right in redemption of capital in case of winding up
of a company.
iv.
Absence of voting rights
Merits
of Preference shares:
i.
Helps to collect huge funds.
ii.
No fixed liability.
iii.
No charge over assets.
Demerits
of Preference shares:
i.
Risk of Fluctuating return.
ii.
Dividend not treated as as expense.
iii.
No voting rights.
Q. What are preferential
rights which are enjoyed by preference shareholders?
Ans: - Following are the
preferential rights enjoyed by the preference shareholders:
I.
Preference shareholders have a right to receive fixed rate of
dividend out of net profits of the company before any dividend declared for the
equity shareholders.
II.
Preference shareholders enjoy a right to receive their capital
after creditor are paid off at the time of liquidation.
Q. What
are various types of Preference shares?
Ans: - Types of Preference Shares
i.
Cumulative and Non-Cumulative Preference shares
ii. Participating and Non-Participating
preference shares
iii. Convertible and Non Convertible
preference shares
Q. Distinguish between
cumulative and non cumulative preference.
Ans: - The holders of cumulative
preference shares are entitled to arrears of dividend on their shares to be
paid out of the profits of the subsequent year’s .All preference shares are
assumed to be cumulative.
In case of non-cumulative preference shares,
dividends if not paid in one year, cannot accumulate and cannot be carried
forward.
Q. Distinguish between
participating and non-participating preference shares.
Ans: - Participating preference
shares carry a fixed rate of dividend in priority to equity shares and has
right to participate in profits along with equity shares after satisfying
normal claims to equity shares.
They
have two kinds of dividends-
- Fixed
dividend
- Changing
Dividend
Non
Participating preference shares do not carry the right to share in the surplus
profits.
Q. Distinguish between
Convertible and non Convertible preference shares.
Ans: - In case of convertible
preference shares there is a right to convert their shares into equity shares
within fixed period of time.
Non
Convertible preference shares cannot be converted into equity shares.
Q. Distinguish between
secured and unsecured debentures.
Ans: - Secured debentures are
secured by the charge on the assets or the property of the company. These
debenture holders have the right to recover their debt due from the company a
fixed charge is created on the assets of the company. A floating charge is
created on the assets of the company. Unsecured debentures do not carry any
charge on the assets of the company. The holders of unsecured debentures are
ordinary creditors of the company.
Q. Define fixed capital.
State its importance.
Ans: - According to Wheeler
"Fixed Capital is invested in fixed or long run assets. The amount of
fixed capital needed, therefore varies directly with the amount of fixed assets
owned or used by the business."
Importance of Fixed Capital:
I.
Fixed Capital is required for buying, maintaining, extending or
replacing the fixed assets essential for a company. Fixed Capital consists of
permanent assets like land, building, machinery, equipment and tools.
II.
Fixed capital is important for the evolution, expansion,
diversifying & maintaining the fixed assets. It is invested in fixed
tangible & intangible assets which will be used to generate revenue for the
enterprise. Thus earning capital of a firm depends on fixed capital.
Q. What is meant by
working Capital? State its importance.
Ans: - Working Capital is required
for day to day operations of the business. Working capital is computed when the
current liabilities are deducted by Current Assets.
Working
Capital is required for the following purposes:
i.
To meet the cost of inventories
ii.
To pay wages and salaries
iii. To
meet overhead cost
iv. To
meet selling and distribution expenses
Working
Capital is required for a smooth functioning and profitability of a firm.
Adequate working capital is the lifeblood and nerve controlling system of the
firm.
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