Commerce Accountancy · Economics

Equity Shares and Capital

505 Questions

Equity shares and capital topics deal with corporate share issuance, forfeiture rules, dividend distributions, and yield calculations. Questions require an understanding of financial instruments like preference shares and call options. These concepts are essential for accountancy and commerce examinations.

Share valuationDividend yieldPreference sharesShare forfeitureCapital structure

Equity Shares and Capital Questions

Multiple choice commercial applications marketing mix - 4 p's meaning and objectives of pricing pricing strategies pricing

The capitalization rate of a company whose market price per share is Rs.28, net income is Rs.20 lakhs and the number of outstanding shares is 5.6 lakh is _____________.

  1. 0.039

  2. 0.078

  3. 0.127

  4. 0.156

  5. 0.254
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Capitalization rate = earning per share / market price of the share
Earnings per share = 20 lakh / 5.6 lakh = Rs. 3.5714 per share.

Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

X limited issued 10,000 equity shares of Rs.10 each at premium Rs.2 each. The company has incurred issue expenses of Rs.5,000. The equity shareholders expect dividend of $18\%$ then cost of capital is ____________.

  1. $18\%$
  2. $15.65\%$
  3. $16.65\%$
  4. $18.65\%$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

K$ _e$ = $\frac{D _1}{NP}$
Where NP i.(E) Net Proceed of shares = $\frac{1000 X12 - 5000}{10000}$
Dividend of a share (D$ _I$) = Rs. 1.8.

Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

Which of the following feature(s) of preference shares are similar to those of equity shares?

  1. Redeemability

  2. No obligation to pay dividend

  3. Voting rights

  4. Change over assets

  5. Both (B) and (C) above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Like in the case of equity shareholders there is no obligatory payment to the preference shareholders and the preference dividend is not tax deductable.

Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

Equity share holders may receive ___________ on their investment.

  1. Interest

  2. Dividend

  3. Bonus

  4. (B) and (C)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Equity share holders may receive  dividend and bonus on their investment. Dividend refers to the sum of money which are paid out of the total profits and bonus refers to the one time payment.

Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

The issuer company cannot make allotment of shares unless ______________.

  1. There is over subscription

  2. The minimum subscription has been subscribed

  3. Promoter has subscribed

  4. All of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Minimum Subscription: It is said to be the minimum amount which as per the directors must be raised by issuing shares to overcome various expenses like working capital required, preliminary expenses, repayment of money borrowed or any other payment etc. Company has to make sure that it must receive share applications for minimum subscription as mentioned in the prospectus, before it applies for the certificate pf commencement of business. Company has to refund back all the money received from the applicants and cannot make any allotment, if the amount of capital subscribed by the public is less than the minimum subscription or if the company could not get minimum subscription within 120 days of the issue of prospectus.

Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

The premium on issue of shares must be treated as __________.

  1. Revenue Receipt

  2. Deferred Revenue Receipt

  3. Capital Receipt

  4. Capital Loss
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
Capital Receipt:-

These have a nature of non-recurrence, besides that, they are situated in the balance sheet in the liabilities portion of them. The capital receipt is always in the interchange for the income. The capital receipt is a kind of cash-flow in the business that does not occur over and over again and this eventually, leads to the creation of liabilities in the future and also, the decrement of assets takes place in the future.

All of the capital receipts are free from taxation unless there is a provision to tax it. Various types of Gifts and loans are the types of the capital receipts that do not attract tax and are tax-free. So, in addition to non-recurring, Capital receipts are those non-routine receipts which either becomes a load and responsibility or cause a vivid depletion in the assets of the government or any organization and business.

The following sources are the generators of the capital receipt:
• Additional capital and mentioned assets introduced by the owner or the possessor
• Debentures and the other  issues of debt instruments
• Loans borrowed from a bank or from a financial institution.
• Various insurance Claims.
• Issue of Shares
So, basically, capital receipts are those that are the derivation of the not so normal operations of a business. Besides that, the effect of capital receipt is depicted in the balance sheet. These receipts are not at all a part of normal operations of government business. For example, a sale of fixed assets, etc.
Multiple choice organisation of commerce and management sources of business finance - 2 equity shares share and stock equity and preference shares

If forfeited shares are re-issued at a premium, the amount of such premium should be creted to ______________.

  1. Capital Reserve Account

  2. Securities Premium Account

  3. Revenue Reserve Account

  4. Profit & Loss Account
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Issue of Shares at Premium:

Shares are said to be issued at premium when they are issued at a price higher than the face value.
 
The excess of issue price over face value is referred to as ‘share premium’ or ‘security premium’, which is credited to a separate account called ‘securities premium account’.
 
For example, A Ltd. issues 10,000 shares of face value of ₹ 10 each at ₹ 12 per share. Here ₹ 2 (₹ 12 - ₹ 10) is treated as ‘security premium’.
 
The amount collected as share premium is disclosed under ‘Reserves and Surplus’ on the liabilities side of the balance sheet.
 
Section 78 of The Companies Act has laid down the following purposes for which the securities premium can be utilized:
To issue fully paid bonus shares to its members
To write off preliminary expenses of the company
To write off expenses in relation to the issue of shares or debentures of the company
To provide for premium payable on redemption of preference shares and debentures of the company
Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

Call option is?

  1. A contract to buy a certain number of shares at a stated price within a specified period of time.

  2. A contract to sell a certain number of shares at a stated price within a specified period of time.

  3. The option of the issuing company to demand the shareholders to pay for the partly paid shares.

  4. The option available to the convertible debenture holders to demand equity shares in conversion of debentures.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A call option is an agreement that gives the option buyer the right to buy the underlying asset at a specified price within a specific time period.

Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

A company pays dividend out of _____________________.

  1. Profits of the company for year for which dividends are to be paid.

  2. Undistributed profit of the previous financial years.

  3. Money provided by the central and state governments for the payment of dividends in pursuance of their guarantors.

  4. All of these.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Dividends - Dividends are the sum of money to be paid to the members of the company out of the profits made by the company.

Sources od dividend :-
1. Profits of  the compnany for the year for which dividends are to be paid.
2. Undistributed profit of the previous financial years.
3. Money provided by the central and state governments for the payment of dividends in pursuance of their guarantors.

Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

The dividend per share in a company is Rs. 2, earning per share is Rs. 5, and the market value is Rs. 25. What will be its yield?

  1. 20 per cent

  2. 12.5 per cent

  3. 8 per cent

  4. 25 per cent
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Yield ratio = A financial ratio that indicates how much a company earns after   pays out in dividends each year relative to its share price.  yield ratio  is   represented as a percentage.

  yield ratio = ( Earning per share / Share price)* 100
  yield ratio = ( Rs.5 / Rs. 25) * 100
  yield ratio =  20 percent.                                   

Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

The authorised capital of M Ltd. consists of both cumulative preference shares and equity shares. Each $5$% cumulative preference share has a par value $Rs. 100$. Each equity share has a par value $Rs. 10$. During the year $2005-06$, the cumulative preference share capital was $Rs. 2,00,000$
If dividend declarations totalled $Rs. 25,000$ in the year $2005-06$, the dividends allocated to the equity shareholders in  the year $2005-06$ will be ___________.

  1. $Rs. 21,000$
  2. $Rs. 15,000$
  3. $Rs. 10,000$
  4. $Rs. 16,000$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Dividend is a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).
 As the name syas, preference shareholders have prefernce over equity shareholders in payment of dividend.
Calaculation of dividend payablr on 5% cumulative prefence share capital is
Annual dividend =  Par value of share * Rate of dividend
Annual dividend = Rs. 200000 * 5%
Annual dividend = Rs. 10000
Dividend for equity shareholder = total dividend - preference dividend
Dividend for equity shareholder = Rs.25000 - Rs. 10000
Dividend for equity shareholder = Rs. 15000
Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

Use the following information for questions given ahead:
B Ltd. was registered with a share capital of $Rs. 2,00,00,000$ divided into equity shares of $Rs. 10$ each. It issued $Rs. 1,80,00,000$ equity shares to the general public at par payable as to $Rs. 3$ on application, $Rs. 3$ on allotment and balance in $2$ equal calls. The public had subscribed for $17,00,000$ shares. Till $31st$ March, $2006$, only first call had been made. All the shareholders had paid up except Mr. C, a holder of $50,000$ shares, who did not pay the call money.
B Ltd.'s Issued Capital will be ____________.

  1. $Rs. 2,00,00,000$
  2. $Rs. 1,80,00,000$
  3. $Rs. 1,70,00,000$
  4. $Rs. 1,36,00,000$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Issued capital can be taken as the part of the authorized capital, which is actually offered to the public for subscription. The number of issued stock is a sub-group of the total authorized or registered shares. Issued capital is the quantity of stock which the BOD (Board of Directors) or stockholders have decided to assign. Generally, a company does not issue the entire authorized shares at a time so that the issued capital is always less than the authorized capital. 

Issued capital does not get affect by subscribed or paid up capital and hence, in the given question B Ltd.'s Issued capital is Rs. 1,80,00,000.

Multiple choice elements of accounts accounts from incomplete records stakeholders and their information requirements ascertainment of profit and loss calculation of profit or loss under single entry system of accounting and statement of affairs accounts from incomplete records - single entry system

Use the following information for questions given ahead:
D Ltd. issued $2,00,000$ shares of $Rs. 100$ each at a premium of $Rs. 20$ per share payable as follows:
On application $Rs. 20$; On allotment $Rs. 50$ (including premium); On first call $Rs. 30$; On second and final call $Rs. 20$.
Applications were received for $3,00,000$ shares and pro-rata allotment was made to applications of $2,40,000$ shares. Money excess received on application was employed on account of sum due on allotment as part of share capital. A, to whom $4,000$ shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited and B, the holder of $6,000$ shares, failed to pay the two calls and his shares were forfeited after the second call. Of the forfeited shares, $8,000$ shares were reissued to C at a discount of $10$%, the whole of A's forfeited shares being reissued.
Amount refunded to shareholders will be ______________

  1. $Rs. 20,00,000$
  2. $Rs. 16,00,000$
  3. $Rs. 12,00,000$
  4. $Rs. 8,00,000$
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
An oversubscribed security offering often occurs when the interest for an initial public offering (IPO) of securities exceeds the total number of shares issued by the underlying company. 
Pro rata is the term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole. While a pro rata calculation can be used to determine the appropriate portions of any given whole, it is most commonly used in business finance.
Therefore, in the given case:
| No. of share applied for                 (1) | No. of share Allotted          (2) | Amount received on application        (3) | Amount required on allotment         (4) | Amount adjusted on allotment         (5) | Refund     (3) – (4) | | --- | --- | --- | --- | --- | --- | |        300000 |           240000 |       6000000 |       4800000 |           Nil |      1200000 |