Equity shares - class-XI

Question 1 Multiple Choice (Single Answer)

The money raised by issue of equity shares is called ________ share capital.

Equity
Preference
Bonus
Right

Question 2 Multiple Choice (Single Answer)

________ shares is the most important source of raising long term capital by a company.

Equity
Preference
Bonus
Right

Question 3 Multiple Choice (Single Answer)

Equity shares are suitable for investors who are willing to assume risk for ________ returns.

Lower
Higher
Medium
Equal

Question 4 Multiple Choice (Single Answer)

Which of the following is a merit of equity shares?

Equity capital provides credit worthiness to the company.
Equity shares are suitable for investors who are willing to assume risk for higher returns.
Equity capital serves as permanent capital.
All of the above

Question 5 Multiple Choice (Single Answer)

The cost of equity shares is generally _______ as compared to the cost of raising funds through other sources.

more
less
medium
equal

Question 6 Multiple Choice (Single Answer)

As equity capital stands last in the list of claims, it provides a cushion for __________.

Debtors
Creditors
Owners
Customers

Question 7 Multiple Choice (Single Answer)

Investors who need steady income may not prefer equity shares as they get ___________ returns.

Fixed
Fluctuating
Higher
Lower

Question 8 Multiple Choice (Single Answer)

Equity capital serves as ____________ capital as it is to be repaid only at the time of liquidation of a company.

Temporary
Permanent
Fluctuating
Fixed

Question 9 Multiple Choice (Single Answer)

Equity shares represent the __________ of a company.

Creditors
Debtors
Ownership
Capital

Question 10 Multiple Choice (Single Answer)

If the rights of a particular class of share holders is to be changed then the company should call __________.

shareholders meeting
directors
class meetings
preference shareholder meeting

Question 11 Multiple Choice (Single Answer)

For a guarantee company the liability of shareholder is ____________.

amount of guarantee specified in memorandum
amount of guarantee given on paper
both A & B
unlimited

Question 12 Multiple Choice (Single Answer)

Equity share holders may receive ____ on their investment.

interest
dividend
bonus
(B) & (C)

Question 13 Multiple Choice (Single Answer)

The Rights Shares are allotted only to the existing ________ of the company.

equity shareholders
debenture shareholders
deposit holders
(B) & (C)

Question 14 Multiple Choice (Single Answer)

Which of the following section of the Companies Act, 2013 prohibits to issue of shares at discount?

Section 53
Section 54
Section 55
Section 56

Question 15 Multiple Choice (Single Answer)

__________ have the right to vote on any resolution placed before the company or general meeting.

Preference shareholder
Equity shareholders
Debenture holder
All of the above

Question 16 Multiple Choice (Single Answer)

Equity shareholder is _________.

entitled to dividend at a fixed rate
not entitled to dividend at a fixed rate
entitled to dividend of preference shareholder
all of the above

Question 17 Multiple Choice (Single Answer)

Which of the following type of security can be issued at discount as per Companies Act, 2013?
(1) Equity Shares
(2) Sweat Equity Shares
(3) Preference Shares
(4) Debentures
(5) Bonds
Select the correct answer from the option given below :-

(1) & (3) only
(1) & (3) & (4) only
(2), (4) & (5) only
(3), (4) & (5) only

1. Equity shares

Meaning:

Equity shares are the main source of finance of a firm. It is issued to the general public. Equity share¬holders do not enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.

Features of Equity Shares.

The main features of equity shares are:

1. They are permanent in nature.

2. Equity shareholders are the actual owners of the company and they bear the highest risk.

3. Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without consideration to other person.

4. Dividend payable to equity shareholders is an appropriation of profit.

5. Equity shareholders do not get fixed rate of dividend.

6. Equity shareholders have the right to control the affairs of the company.

7. The liability of equity shareholders is limited to the extent of their investment.

Advantages of Equity Shares:

Equity shares are amongst the most important sources of capital and have certain advantages which are mentioned below:

i. Advantages from the Shareholders’ Point of View

(a) Equity shares are very liquid and can be easily sold in the capital market.

(b) In case of high profit, they get dividend at higher rate.

(c) Equity shareholders have the right to control the management of the company.

(d) The equity shareholders get benefit in two ways, yearly dividend and appreciation in the value of their investment.

ii. Advantages from the Company’s Point of View:

(a) They are a permanent source of capital and as such; do not involve any repayment liability.

(b) They do not have any obligation regarding payment of dividend.

(c) Larger equity capital base increases the creditworthiness of the company among the creditors and investors.

Disadvantages of Equity Shares:

Despite their many advantages, equity shares suffer from certain limitations. These are:

i. Disadvantages from the Shareholders’ Point of View:

(a) Equity shareholders get dividend only if there remains any profit after paying debenture interest, tax and preference dividend. Thus, getting dividend on equity shares is uncertain every year.

(b) Equity shareholders are scattered and unorganized, and hence they are unable to exercise any effective control over the affairs of the company.

(c) Equity shareholders bear the highest degree of risk of the company.

(d) Market price of equity shares fluctuate very widely which, in most occasions, erode the value of investment.

(e) Issue of fresh shares reduces the earnings of existing shareholders.

ii. Disadvantage from the Company’s Point of View:

(a) Cost of equity is the highest among all the sources of finance.

(b) Payment of dividend on equity shares is not tax deductible expenditure.

(c) As compared to other sources of finance, issue of equity shares involves higher floatation expenses of brokerage, underwriting commission, etc.

2. Debentures

A debenture is one of the most typical forms of long term loans that a company can take.

It is normally a loan that should be repaid on a specific date, but some debentures are irredeemable securities (sometimes referred to as perpetual debentures).

The majority of debentures come with a fixed interest rate. This interest must be paid before dividends are paid to shareholders.

Debenture holders

Debenture holders (investors) are not allowed to vote in the company's general shareholders meetings, but they may have separate meetings or votes, for instance regarding changes to the rights associated with the debentures.

The interest that is paid to debenture holders is calculated as a charge against profit in the company's financial statements.

Types of debentures

Debentures come in two types:

Convertible debentures: Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. To investors, convertible bonds are more attractive because the bonds can be converted, and to companies they have the advantage that they normally have lower interest rates than non-convertible corporate bonds.

Non-convertible debentures: Standard debentures that can't be converted into equity shares of the liable company. Since they can't be converted, they usually have higher interest rates than convertible debentures.

Benefits

Debentures are mainly beneficial to companies by having a lower interest rate than other types of loans, e.g. overdrafts. Further, they normally only need to be repaid by a very remote date.

The main benefits of debentures to investors is that they can usually be sold in stock exchanges quite easily and they come with less risk than e.g. equities.

3. Bonds

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.

The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.

Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investment, or, in the case of government bonds, to finance current expenditure.

Question 18 Multiple Choice (Single Answer)

When shares are not payable in a lump sum, first instalment is called ___________.

Application Money
Allotment Money
First Call Money
Final Call Money

Question 19 Multiple Choice (Single Answer)

Shares forfeited account is to be shown in the balance sheet by way of ____________ to the paid up share capital on the liabilities side until the concerned shares are re-issued.

Addition
Deduction
Both (A) & (B)
Neither (A) nor (B)

Question 20 Multiple Choice (Single Answer)

Which of the following security can be forfeited for non-payment of allotment or call money?
(I) Equity Shares
(II) Equity Shares, Preference Shares
(III) Preference Shares, Equity Shares & Debentures
(IV) Debentures
Select the correct answer from the options given below :-

(I) only
(III) only
(I) & (IV) only
(II) only

Meaning:

Equity shares are the main source of finance of a firm. It is issued to the general public. Equity share¬holders do not enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.

Features of Equity Shares

The main features of equity shares are:

1. They are permanent in nature.

2. Equity shareholders are the actual owners of the company and they bear the highest risk.

3. Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without consideration to other person.

4. Dividend payable to equity shareholders is an appropriation of profit.

5. Equity shareholders do not get fixed rate of dividend.

6. Equity shareholders have the right to control the affairs of the company.

7. The liability of equity shareholders is limited to the extent of their investment.

Advantages of Equity Shares

Equity shares are amongst the most important sources of capital and have certain advantages which are mentioned below:

i. Advantages from the Shareholders’ Point of View

(a) Equity shares are very liquid and can be easily sold in the capital market.

(b) In case of high profit, they get dividend at higher rate.

(c) Equity shareholders have the right to control the management of the company.

(d) The equity shareholders get benefit in two ways, yearly dividend and appreciation in the value of their investment.

ii. Advantages from the Company’s Point of View:

(a) They are a permanent source of capital and as such; do not involve any repayment liability.

(b) They do not have any obligation regarding payment of dividend.

(c) Larger equity capital base increases the creditworthiness of the company among the creditors and investors.

Disadvantages of Equity Shares:

Despite their many advantages, equity shares suffer from certain limitations. These are:

i. Disadvantages from the Shareholders’ Point of View:

(a) Equity shareholders get dividend only if there remains any profit after paying debenture interest, tax and preference dividend. Thus, getting dividend on equity shares is uncertain every year.

(b) Equity shareholders are scattered and unorganized, and hence they are unable to exercise any effective control over the affairs of the company.

(c) Equity shareholders bear the highest degree of risk of the company.

(d) Market price of equity shares fluctuate very widely which, in most occasions, erode the value of investment.

(e) Issue of fresh shares reduces the earnings of existing shareholders.

ii. Disadvantage from the Company’s Point of View:

(a) Cost of equity is the highest among all the sources of finance.

(b) Payment of dividend on equity shares is not tax deductible expenditure.

(c) As compared to other sources of finance, issue of equity shares involves higher floatation expenses of brokerage, underwriting commission, etc.

Preference shares are those shares which carry certain special or priority rights. Firstly, dividend at a fixed rate is payable on these shares before any dividend is paid on equity shares.

Secondly, at the time of winding up of the company, capital is repaid to preference shareholders prior to the return of equity capital. Preference shares do not carry voting rights. However, holders of preference shares may claim voting rights if the dividends are not paid for two years or more on cumulative preference shares and three years or more on non-cumulative preference shares.

Preference shares have the characteristics of both equity shares and debentures. Like equity shares, dividend on preference shares is payable only when there are profits and at the discretion of the Board of Directors.

Preference shares are similar to debentures in the sense that the rate of dividend is fixed and preference shareholders do not generally enjoy voting rights. Therefore, preference shares are a hybrid form of financing.

Advantages:

1. Appeal to Cautious Investors:

Preference shares can be easily sold to investors who prefer reasonable safety of their capital and want a regular and fixed return on investment.

2. No Obligation for Dividends:

A company is not bound to pay dividend on preference shares if its profits in a particular year are insufficient. It can postpone the dividend in case of cumulative preference shares also. No fixed burden is created on its finances.

3. No Interference:

Generally, preference shares do not carry voting rights. Therefore, a company can raise capital without dilution of control. Equity shareholders retain exclusive control over the company.

4. Trading on Equity:

The rate of dividend on preference shares is fixed. Therefore, with the rise in its earnings, the company can provide the benefits of trading on equity to the equity shareholders.

5. No Charge on Assets:

Preference shares do not create any mortgage or charge on the assets of the company. The company can keep its fixed assets free for raising loans in future.

6. Flexibility:

A company can issue redeemable preference shares for a fixed period. The capital can be repaid when it is no longer required in business. There is no danger of over-capitalisation and the capital structure remains elastic.

7. Variety:

Different types of preference shares can be issued depending on the needs of investors. Participating preference shares or convertible preference shares may be issued to attract bold and enterprising investors.

Preference shares can be made more popular by giving special rights and privileges such as voting rights, right of conversion into equity shares, right of shares in profits and redemption at a premium.

Disadvantages:

1. Fixed Obligation:

Dividend on preference shares has to be paid at a fixed rate and before any dividend is paid on equity shares. The burden is greater in case of cumulative preference shares on which accumulated arrears of dividend have to be paid.

2. Limited Appeal:

Bold investors do not like preference shares. Cautious and conservative investors prefer debentures and government securities. In order to attract sufficient investors, a company may have to offer a higher rate of dividend on preference shares.

3. Low Return:

When the earnings of the company are high, fixed dividend on preference shares becomes unattractive. Preference shareholders generally do not have the right to participate in the prosperity of the company.

4. No Voting Rights:

Preference shares generally do not carry voting rights. As a result, preference shareholders are helpless and have no say in the management and control of the company.

5. Fear of Redemption:

The holders of redeemable preference shares might have contributed finance when the company was badly in need of funds. But the company may refund their money whenever the money market is favourable. Despite the fact that they stood by the company in its hour of need, they are shown the door unceremoniously.

Question 21 Multiple Choice (Single Answer)

If a company receives excess application money and the application money equal to shares issued transferred to Share Capital A/c and application money received on excess shares-some money is adjusted and against allotment and remaining was refunded, then which of the following entry is correct?

Share Application A/c Dr.

Bank A/c Dr.

To Share Allotment A/c

To Share Capital A/c
Share Application A/c Dr.

To share Allotment A/c Dr.

To Share Capital A/c

To Bank A/c
Share Allotment A/c Dr.

Share CapitalA/c Dr.

To Bank A/c

To Share Application A/c
None of the above

Question 22 Multiple Choice (Single Answer)

The forfeited shares may be re-issued:-
(I) At par only
(II) At par or premium only
(III) At par or at discount only
(IV) At or par at premium or at discount
The correct answer is :

(II)
(III)
(I)
(IV)

Question 23 Multiple Choice (Single Answer)

Balance of share forfeiture account remaining after reissue is transferred to ________________.

Capital Reserve A/c
Securities Premium A/c
Revenue Reserve A/c
Profit & Loss A/c

Question 24 Multiple Choice (Single Answer)

In case of oversubscription of shares each applicant receives the shares in some proportion, it is known as ____________.

Bonus allotment
Right allotment
Per applicant allotment
Pro rata allotment

Question 25 Multiple Choice (Single Answer)

_______may be said to be the compulsory termination of membership by way of penalty for non-payment of allotment and/or any call money.

Surrender of shares
Forfeiture of shares
Transfer of shares
Transmission of shares

Question 26 Multiple Choice (Single Answer)

Which of the following statement is false?

Equity shares have a right to vote on every resolution of the company
Preference shares cannot vote on all the resolutions of the company
All the equity shareholders have equal voting rights
All of the above

Question 27 Multiple Choice (Single Answer)

Articles of unlimited company having share capital is included in_______.

Table I
Table G
Table H
Table F

Question 28 Multiple Choice (Single Answer)

Which of the following statements is true?

A person having share warrant is a member of the company
A person having share warrant is only a shareholder of the company and not a member
A legal representative of a deceased shareholder is not a shareholder of a company
All of the above

Question 29 Multiple Choice (Single Answer)

The shares issued for providing know how, intellectual property rights, etc are called ____________.

Golden shares
Right shares
Sweat Equity shares
Bonus shares

Question 30 Multiple Choice (Single Answer)

A company with a paid up Capital of 5,000 equity shares of Rs.10 each has a turnover of four times with a margin of 8% on sales.
The ROI of the company will be______.

28%
32%
35%
42%

Equity shares - class-XI

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