Tag: company accounts part - 2 (accounting for debentures)

Questions Related to company accounts part - 2 (accounting for debentures)

Given following data calculate cost of capital under Net Income (NI) Approach 
(1) EBIT is Rs. 20 Lakhs.
(2) 4,00,000 shares of Rs. 10 each & market capitalisation is $16\%$ 
(3) 25,000, $14\%$ debentures of Rs. 150 each.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. $16\%$

  2. $14\%$

  3. $15\%$

  4. $15.42\%$

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Correct Option: D
Explanation:

First calculate net earnings available to equity shareholders deducting interest on debt i.e. NI then calculate market value of equity i.e. $\frac{NI}{K _e}$ where $k _e$ = market capitalization rate then value of firm V = S + B lastly $K _e$ = $\frac{EBIT}{V}$.

Non-convertible debentures are ________________.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. debt instruments which acquire equity status at the issuers option

  2. debt instruments which retain their debt character and cannot acquire equity status

  3. debt instruments which acquire equity status with the permission of Registrar of Companies

  4. debt instruments which acquire equity status on maturity

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Correct Option: B

Debenture holders are entitled to _________.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. dividend

  2. bonus

  3. interest

  4. commission

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Correct Option: C

Which of the following is the odd one?

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. Net worth

  2. Owners equity

  3. Fixed interest liability

  4. Non-redeemable shares

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Correct Option: C

A debenture holder is not entitled to _________.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. voting right

  2. claim dividend

  3. claim bonus shares

  4. all the above

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Correct Option: D

Debenture holders are ________.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. owners of the company

  2. lenders of the company

  3. debtors of the company

  4. trustee of the company

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Correct Option: B

Which of the following is incorrect with respect of debentures?

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. They can be issued for cash

  2. They can be issued for consideration other than cash

  3. They can be issued as collateral security

  4. They can be issued in lieu of dividends

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Correct Option: D

In the event of liquidation of the company the debenture holders have prior right for __________.

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. interest

  2. principal amount

  3. both (a) & (b)

  4. none of the above

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Correct Option: D

When a company is not earning profits, then which of the following securities proves a burden on the finances of the company?

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. Equity Shares

  2. Preference Shares

  3. Redeemable Preference Shares

  4. Debentures

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Correct Option: D

Which of the following is false?

book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

  1. Equity is owners' stake and the debentures is a debt

  2. Rate of interest on debentures is fixed

  3. Debenture holders get preferential treatment over the equity holders at the time of liquidation

  4. Interest on debentures is an appropriation of profits

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Correct Option: D