They are the foundation for the creation of a company. It cannot issue shares every time. (d) Internal Sources and External Sources Question 4. Debentures have certain merits and demerits from business as well as debenture holders point of view. d. The brain can now formulate the correct answer without noise. 2- When going public to the investors, the issue of shares is compulsory while the issue of debentures is optional. Unless they are redeemable, issuing preference shares will lower the companys gearing. Limited Liability. It allows the lessee to acquire the asset with lesser investment. Investors can invest in the shares of any company by buying the shares from the open market or by subscribing to the IPO. Shares can never be converted into any form of capital structure, while debentures can be converted into shares or other ownership capital. Debentures are the companys acknowledgment of the debt borrowed by the particular corporate entity towards the fund provider, i.e., an investor in the form of debt. Corporations and governments can issue debentures. The difference between ordinary shares and preference shares can be understood from the below table: Ordinary Shares. Differentiate between: (b) Short Term Finance and Long Term Finance Question 5. Answers: It is a hybrid security, neither bond nor stock. (b) Short Term Finance and Long Term finance Fourth Quarter 2022 Financial Highlights. Give reasons to support your answer. Bond: What's the Difference? 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. Answer:Equity shares and retained earnings. In return, investors are compensated with an interest income for being a creditor to the issuer. Also as the dividend is payable only at the discretion of the directors and only out of profit after tax, to that extent, these resemble equity shares. Answer:Following preferential rights are enjoyed by the preference shareholders: Question 5. Similar to debentures, warrants also have the right to purchase equity shares of a company. The Company's statutory debt to equity was 1.29x as of December 31, 2022. Question 1. Name two sources of funds under owners fund. How will a company's expansion plan that will be financed by debt and equity be affected by it's cash flow They have voting rights in the meeting of the company and have a control over the working of the company. Non-Convertible Debentures When period of lease expires, the asset is returned to the lessor. The preference dividend is also paid out of net profits after taxes, but the only difference is that the dividend is fixed. Question 4. However, their claims are discharged before the shares of common stockholders at the time of liquidation. Both corporations and governments frequently issue debentures to raise capital or funds. Write a note on international sources of finance. At the same time, debentures are the debt instruments issued by the company to raise funds. This date dictates when the company must pay back the debenture holders. These are called retained earnings. A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years. For the company, it is mandatory for the company for payment and repayment of interest and debt. What are the Factors Affecting Option Pricing? When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. Question 24. However, they also face the risk of inflation and interest rates increase. List sources of raising long-term and short term finance. Fully Convertible Debenture: Fully convertible debentures are those debentures which are fully converted into specified number of equity shares after predetermined period at the option of the debenture holders. Maturity: Equity shares provide permanent capital to the company and cannot be redeemed during the life time of the company. Working Capital Requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. (c) Working capital requirement (d) Lease financing A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. Debentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. A call option allows the holder of the option to buy something at a certain price and on or before a certain date, whereas a put option allows selling. Answer:Various sources of long term funds include: Equity shares, preference shares, debentures, retained earnings, loans from financial institutions, loans from commercial banks etc. Question 1. They are not secured by collateral, yet they are considered risk-free securities. This article throws light upon the three main types of long term financing. It has a fixed interest rate with cumulative and non-cumulative features redeemable after a fixed interval, either in installment or lump sum. B. liability to you and an asset to the bank. 6. Credit-rating agencies measure the creditworthiness of corporate and government issues. The holders of shares are the owners of a company. Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. The normal business operations may be affected if lease is not renewed. The company's credit rating and ultimately the debenture's credit rating impacts the interest rate that investors will receive. Answer:Following financial instruments are used in international financing: Question 6. Shares are the ownership capital that the owners of the company hold. (vb) If f. As a source of finance, retained profit is better than other sources. Account Disable 12. What is the difference between internal and external sources of raising funds? The characteristics are: 1. Since debentures have no collateral backing, they must rely on the. The bank performs three types of functions namely, assistance to other financial institutions, direct assistance to industrial concerns and promotion and coordination of financial technique service. They have a claim on income left after paying dividend to preference shareholders. Directors are appointed in the Annual General Meeting by majority votes. There are debt instruments that accompany options that may be a call or put. Features/Merits 1. Explain. (iii) It is the cheapest source of internal financing. What is the difference between GDR and ADR? Also Read: Advantages and Disadvantages of Preference Shares. Do you agree with this view? Funds required for purchasing current assets is an example of The pre-emptive right protects equity shareholders by ensuring that management cannot issue additional shares to persons of their choice in order to strengthen their control over the company. A bearer debenture, in contrast, is not registered with the issuer. Answer:A business needs finance because: Question 3. The direct method is more consistent with the primary purpose of the statement of cash flows. Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. If he wants control in the company or participation in management of the company, he should invest in equity shares. Question 1. Why do businesses need funds? (a) Produces and distributes the goods or services c) It is a permanent source of capital and is not redeemed during the lifetime of the company. For the most part, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Investopedia does not include all offers available in the marketplace. If this happens, the debenture holder earns a lower yield in comparison. Strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. Debentures can be issued with the option of getting converted into shares. 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 Answer:WIPRO and ICICI, Question 14. Who regulates the acceptance of public deposits? In finance, a warrant is a security that entitles the holder to buy or sell stock, typically the stock of the issuing company, at a fixed price called the exercise price.. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. The Standard & Poors system uses a scale that ranges from AAA for excellent rating to the lowest rating of C and D. Anydebt instrument receiving a rating lower than a BB is said to be of speculative grade. Give the full form of GDR and ADR. Answer: Debtors are the people who owe money to a business. Learn more about corporate, government, and municipal bonds. You will have the PDF on your device to study offline. Basically, a debenture is a type of bond that isnt secured by collateral. Answer: Debentures are similar to shares, however, debenture holders do not have voting rights on how the business is run. James Chen, CMT is an expert trader, investment adviser, and global market strategist. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures. 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. T-bonds are nearly risk-free since they're backed by the full faith and credit of the U.S. government. Scope of retained earnings is limited by amount of profits. If he is interested in middle term investment, he should invest in preference shares or debentures. Debenture vs. Question 21. The Board of Directors of Monroe also declared its first quarter distribution of $0.25 per share, payable on March 31, 2023 to stockholders of . It is a negotiable instrument and can be traded freely like any other security. Preferred stockholders generally do not have voting rights in the company. Every company doesnt need to issue Debenture for issues. (d) Sell the assets Question 9. Do you agree with this view? A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. Answer:Equity shareholders get a return only when profits are left after giving interest to debenture holders and preferential dividend to preference shareholders. Each equity share carries one vote and a shareholder has votes equal to the number of equity share held by him. (d). The U.S. Treasury Department issues these bonds during auctions held throughout the year. Answer:Public Deposits: Deposits accepted from public directly by the companies are called public deposits. Question 13. NCERT Solutions Class 11 Business StudiesBusiness Studies Sample Papers, I. (a) Canada (b) China Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. It is easy to download the NCERT Class 11 Books. Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. Let us take an example of DebentureExample Of DebentureDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. Question 15. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company. It cannot be redeemed during the lifetime of the company. Trade credit can meet only limited financial needs. Each component of capital structure has its peculiarities, making it suitable for its situations and circumstances. When the brain reads four answers to a question, the brain performs four commands. Prohibited Content 3. 1. Differentiate between a share and a debenture. (a) Owners of the company (b) Partners of the company The company is not having sufficient money. Right to Income 3. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. Debentures are good from debenture holders point of view but not for business. Long-term instruments include debentures, bonds, GDRs from foreign investors. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. 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. Debentures. AccountingNotes.net. Creditworthiness is important when considering the chance of default risk from the underlying issuer's financial viability. Describe in brief the features of equity shares. Answer:Public deposits. It acknowledges a loan or debt. The first trust is an agreement between the issuing corporation and the trustee that manages the interest of the investors. 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