Issue of Debentures is one of the most common methods of raising the funds available to the company. It cannot issue shares every time. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods. The company may need an additional amount of money for a long period. Maturity 2. The direct method is more consistent with the primary purpose of the statement of cash flows. Which deposits are directly raised from the public? Debentures 5. S&P Global. Question 6. ADRs are issued in The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note. It is dependent on public response and cant be relied on if financial needs are urgent. What is the status of debenture holders? Just click on the link, a new window will open containing all the NCERT Book Class 11 Business Studies pdf files chapter-wise. Answer: GDRs have the following features: Question 8. Answer:A large industrial enterprise can raise capital from the following sources. Convertible debentures are hybrid financial products with the benefits of both debt and equity. Explain in detail the types of debenture a company can issue. Examples are non-convertible debentures, convertible debentures, 2, The share capital is to be disclosed under Shareholders funds on equity and, Debentures are to be disclosed under long term borrowings under. Answer:Global Depository Receipts (GDRs): GDR is an instrument issued by a company to raise funds in some foreign currency and is listed and traded on a foreign stock It is a negotiable instrument and can be traded freely like any other security. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with cumulative preference shares the right to an unpaid dividend is carried forward to later years. (a) Share profits earned by the lessor A specific type of preference share, i.e., irredeemable preference share, does not have a certain maturity. Each source has its own merits and demerits. (d). Debentures represent In many cases, they may not get anything if profits are insufficient; or may get even a higher rate of dividend. Preferred stockholders generally do not have voting rights in the company. Give the full form of GDR and ADR. He is a Chartered Market Technician (CMT). Shares are ownership securities. This source includes raising funds from Issue of debentures, Loans from financial institutions, Public deposits, Trade credit, etc. A-. When company winds up, preference shares are paid before equity shares. Maturities on commercial paper can range up to 365 days. (c) Fluctuating capital of the company (d) Loan capital of the company The normal business operations may be affected if lease is not renewed. (d) 8. (b) Makes the payment on behalf of the client Why do businesses need funds? 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. Do you agree with this view? (c) 4. Bond: What's the Difference? Explain. Preferred stocks are hybrid securities that have the characteristics of both bonds and stocks. Question 22. Debentures may also be either convertible or non-convertible into common stock. 2. Creditworthiness is important when considering the chance of default risk from the underlying issuer's financial viability. A preference share is also a long-term source of equity finance. . 8. Like the two sides of the coin, shares and debentures have advantages and disadvantages. Both are discretionary and have expiration dates. A preference share is also called "hybrid financing instruments" as it has elements of both equity share and debt. A fixed-income security is an investment that provides a steady interest income stream for a certain period. List sources of raising long-term and short term finance. D. asset to both you and the bank. Debentures are also known as a bond which serves as an IOU between issuers and purchaser. Question 7. They receive dividends or bonuses when the company distributes its profits. Answer:The Lessors. (b) Short Term Finance and Long Term Finance (c) Owners Funds and Borrowed Funds Question 2. 40,00,000 6% preference shares 10,00,000 8% Debentures 30,00,000 80,00,000 The market price of the company's equity share is Rs. In the event of a corporation's bankruptcy, the debenture is paid before common stock shareholders. Equity shares are the vital source for raising long-term capital. Answer:Equity shareholders are called the owners of the company. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. Some well-known hybrid financing instruments are preference shares, convertible debentures, warrants, options, etc. These instruments are called EDRs when private markets are attempting to obtain Euros. Investopedia does not include all offers available in the marketplace. There are many sources of finance. What are the preferences given to preference shareholders? Funds required for purchasing current assets is an example of Greatly depends on the business success to reuse its value. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. However, the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed-rate investments. 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. Question 2.The term redeemable is used for 1. In fact, strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. In the stock market, shares and debentures are familiar words when it comes to investment. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company. Debt factoring is a financial service that allows a business to raise funds based on the value owed to them by their debtors. Basically, a debenture is a type of bond that isnt secured by collateral. Debenture is an instrument of loan. Retained earnings are better than other sources of finance because: V. Value Based Questions Issue of debentures for non-cash consideration, Issue of debentures as a collateral security, What is difference between Debentures and 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 Explain. In contrast, the company must make the payment and repayment of interest and principal to the debenture holders.. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. A debenture is a type of bond or other debt instrument that is unsecured by collateral. 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. Companies use debentures as fixed-rate loans and pay fixed interest payments. Therefore, these may carry relatively higher interest rates than otherwise similar bonds from the same issuer that are backed by collateral. Name the source of finance, which is available in normal course of purchase of goods. The distribution of income as dividend to equity shareholders is left to the discretion of the Board of Directors of the Company under the Companies Act, 1956. A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event of liquidation C. trustee is appointed to preserve the interest of the debenture holders. 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". They do this instead of taking out a more traditional loan. Funds required for inventory can be met through it but not others like plant and machinery, land and building or salaries of employees etc. Answer:Public deposits are the deposits raised by organizations directly from the public. Justify your answer. Question 6. Who are called the owners of a company? When the brain reads four answers to a question, the brain performs four commands. A preferred share is a share that enjoys priority in receiving dividends compared to common stock. 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. When easy and flexible trade credit is available, it may induce the firm to indulge in over trading. Answer:Short term sources include trade credit, factoring, banks and commercial papers. Shareholders are the Owners of the company. Public company usually does not create a charge on the assets of the company. Convertible debentures can be converted to equity shares after a specified period, making them more appealing to investors. Two types of debentures are issued by the companies: Convertible Debentures and Non-Convertible Debentures. All these factors need to be paid for their services. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. 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. A company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders. Thus, although, equity shareholders are the real owners of the company, their liability is limited to the value of share they have purchased. Shareholders have the residual right at the time of liquidation. Strictly speaking, a U.S. Treasury bonds are, in this way, debentures. Answer:Retained Profits: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Medium-term loans are loans for a period of three to ten years. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. (c) Collects the clients debt or account receivables Common stock, scrip, owned capital, etc., are the other terms used for Shares. Profit re-invested as retained earnings is profit that could have been paid as a dividend. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students. Because of the increased risk, debentures will carry a comparatively higher interest rate in order to compensate bondholders. (b) Short Term Finance and Long Term finance State two factors affecting the working capital requirement of a firm. News and information is available . The offers that appear in this table are from partnerships from which Investopedia receives compensation. The characteristics are: 1. Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. Difference Between Shares And Debentures. If he is interested in long term investment, he should invest in equity shares. Answer: Question 10. Answer:(a) Fixed Capital and Working Capital It is difficult for a newly established company to be able to get funds from public deposits. What is the difference between internal and external sources of raising funds? Question 11. Equity Share: Advantages and Disadvantages | Finance Sources, Types of Shares: Preference and Equity | Accounting, Equity Shares: Advantages and Disadvantages | Company, Difference between Shares and Debentures | Finance Sources. Your email address will not be published. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Difference Between Shares and Debentures (wallstreetmojo.com). Simple documentations makes it easier to finance assets. That isnt secured by collateral shares, convertible debentures are bonds that can convert into equity shares of the issuer! 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