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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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