Tag: equity and preference shares

Questions Related to equity and preference shares

A company funded through shares ___________.

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

  1. has unlimited liability

  2. exists only in contemplation of law

  3. has a perpetual succession

  4. comes to an end on the death of all the members

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Correct Option: C
Explanation:

A company funded through shares has a perpetual succession. Perpetual succession refers to the law of continuing the organization despite the death, insanity, exit of one member, etc.

________ is the process by which electronic shares of an investor are converted to physical certificates.

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

  1. Rematerialization

  2. Dematerialization

  3. Materialization

  4. None of above

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Correct Option: A
Explanation:

Rematerialization connotes the act of converting the shares held in electronic mode, in the investor's account, into shares in physical form. It is a similar process like De-materialization of shares in which the physical shares are converted into electronic mode.

______ is the process by which physical certificates an investor are converted to an equivalent number of securities in electronic format and credited in the investor's account with a Depository held through a Depository Participant(DP).

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

  1. Rematerialization

  2. Dematerialization

  3. Materialization

  4. None of above

Show answer
Correct Option: B
Explanation:

 Dematerialization is the process by which physical certificates an investor are converted to an equivalent number of securities in electronic format and credited in the investor's account with a Depository held through a Depository Participant(DP). In simple words, dematerialization refers to the conversion of physical form of share to electronic form.

The issuer company cannot make allotment of shares unless ______________.

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

  1. There is over subscription

  2. The minimum subscription has been subscribed

  3. Promoter has subscribed

  4. All of the above

Show answer
Correct Option: B
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.

Public companies issued shares to public through document called ________________.

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

  1. Letter of offers & acceptance

  2. Offer for sale & acceptance

  3. Prospectus

  4. None of above

Show answer
Correct Option: C
Explanation:

A Prospectus is a formal legal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. 


The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction in question; the ,final prospectus containing finalized background information including such details as the exact number of shares/certificates issued and the precise ,offering price is printed after the deal has been made effective. In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management. 

A prospectus includes the name of the company issuing the stock or the mutual fund manager, the amount and type of securities being sold and, for stock offerings, the number of available shares. 

The prospectus also details whether an offering is public or private, how much the underwriters are earning per sale and names of the company’s principals. A brief summary of the company’s financial information, whether the SEC approved the prospectus and other pertinent information is included as well.

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

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

  1. Revenue Receipt

  2. Deferred Revenue Receipt

  3. Capital Receipt

  4. Capital Loss

Show answer
Correct Option: C
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.

The minimum subscription is the ______of the issued amount.

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

  1. 50%

  2. 80%

  3. 75%

  4. 90%

Show answer
Correct Option: D
Explanation:
 Minimum subscription refers to the smallest amount required by the company for its preparatory functions. It has been provided by the Companies Act, that the firm must obtain applications for a certain minimum number of shares before progressing ahead with the allotment of shares in order to deter companies from commencing business with scarce resources. This is called the ‘minimum subscription’. The limit of smallest subscription is 90% of the size of the subject.
The smallest number of protection which may be employed for in any new issue. The Companies Act of 1956 created a legal pattern for this, stating that an organization can only offer a certain quantity of shares to the public that the company can really pay for if the shares are drawn in by the buyer.
For e.g. if the company is issuing 100 shares to the public, then the 90% of the 100 shares should be get subscribed that is 90 shares should be subscribed to went ahead with the allotment.

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

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

  1. Capital Reserve Account

  2. Securities Premium Account

  3. Revenue Reserve Account

  4. Profit & Loss Account

Show answer
Correct Option: B
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

the abbreviation 'ESOP' stands for ___________.

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

  1. Employee Stock Option Plan

  2. Employee Share Option Plan

  3. Employee Share Option Programme

  4. Employee Stock Option Programme

Show answer
Correct Option: A
Explanation:

Definition: An employee stock ownership plan (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.

Description: Under these plans, the employer gives certain stocks of the company to the employee for negligible or less costs which remain in the ESOP trust fund, until the options vests and the employee exercises them or the employee leaves/retires from the company or institution.

These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stock holders, who are also the employees, in the working of the company. The ESOPs help in minimizing problems related to incentives.