Tag: equity and preference shares

Questions Related to equity and preference shares

For a guarantee company the liability of shareholder is ____________.

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. amount of guarantee specified in memorandum

  2. amount of guarantee given on paper

  3. both A & B

  4. unlimited

Show answer
Correct Option: A
Explanation:

A guarantee company is a type of corporation designed to protect members from liability. Guarantee companies often form when non-profit organizations wish to attain corporate status.  For a guarantee company the liability of shareholder is amount of guarantee specified in the memorandum.

Equity share holders may receive ____ on their investment.

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. interest

  2. dividend

  3. bonus

  4. (B) & (C)

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Correct Option: D
Explanation:

Equity share holders are the owners of the company, equity shares are also known as owner's share capital or owner's fund. Equity share holders may receive dividend and/or bonus. The profits that the company earns after the repayment of creditors and other liabilities is received by the equity share holders.

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

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. equity shareholders

  2. debenture shareholders

  3. deposit holders

  4. (B) & (C)

Show answer
Correct Option: A
Explanation:

The Rights Shares are allotted only to the existing equity shareholders. of the company. The shareholders who existed from earlier have the right to subscribe there shares.

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

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. Section 53

  2. Section 54

  3. Section 55

  4. Section 56

Show answer
Correct Option: A
Explanation:

 Section 53 of the Companies Act, 2013 prohibits to issue of shares at discount. It means this section prevents the process of issuing shares at a less price than the actual price.

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

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. Preference shareholder

  2. Equity shareholders

  3. Debenture holder

  4. All of the above

Show answer
Correct Option: B
Explanation:
Equity shares is the most important source of raising long term capital by a company. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Hence, being the owners of the company, equity shareholders have the right to vote on any resolution placed before the company or general meeting.

Equity shareholder is _________.

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. entitled to dividend at a fixed rate

  2. not entitled to dividend at a fixed rate

  3. entitled to dividend of preference shareholder

  4. all of the above

Show answer
Correct Option: B
Explanation:
Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner's funds. They are referred to as residual owners since they receive what is left after all other claims on the company income and assets have been settled. Therefore, equity shareholders are not entitled to dividend at a fixed rate.

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 :-

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. (1) & (3) only

  2. (1) & (3) & (4) only

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

  4. (3), (4) & (5) only

Show answer
Correct Option: C
Explanation:
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.  

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

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. Application Money

  2. Allotment Money

  3. First Call Money

  4. Final Call Money

Show answer
Correct Option: A
Explanation:
Share Application Money: A company receives certain amount from shareholders' on application (known as share application money). Share Application Money Pending Allotment means amount received on application on which allotment is not yet made (pending allotment). Share Application Money Pending Allotment to the extent not refundable is included in Shareholders' Fund (as it is the amount received by the company against which allotment will be made).

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.

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. Addition

  2. Deduction

  3. Both (A) & (B)

  4. Neither (A) nor (B)

Show answer
Correct Option: A
Explanation:
Share forfeited account:-
If a shareholder fails to pay allotment money or a call or a part thereof by the last date fixed for payment, the Board of Directors, if Articles of Association of the company empower it to do so, proceed to forfeit the shares on which allotment money or call has become in arrear.The Articles of Association lay down the procedure. A notice has to be served on the defaulter requiring him to pay the unpaid amount together with interest accrued by a certain date.

The notice also must state that in the event of non-payment on or before the date so named, the shares in respect of which the notice has been served will be liable to be forfeited. When shares are forfeited, the shareholder’s name is removed from the register of members and the amount already paid by him on shares is forfeited to the capital. It is a capital gain and is credited to Forfeited Shares Account. A forfeited share may be reissued even at a loss. But the loss on reissue cannot exceed the gain on forfeiture of the share reissued.

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 :-

commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

  1. (I) only

  2. (III) only

  3. (I) & (IV) only

  4. (II) only

Show answer
Correct Option: D
Explanation:
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.