Answer: Question 4. Further, debentures may carry credit risk and default risk. Like equity shares, dividend on preference shares is payable only when there are profits and at the discretion of the Board of Directors. Strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years. Explain. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, and then finance through retained earnings would be preferred to other methods. Buy backs of listed debt securities convertible into equity shares can be undertaken by . When company winds up, preference shares are paid before equity shares. 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In return, investors are compensated with an interest income for being a creditor to the issuer. Select chapter you wish to download and its done. On the downside, firms are likely to force conversion when it is beneficial to existing shareholders rather than FCD investors. Short Answer Type Questions Fully Convertible Debenture: Fully convertible debentures are those debentures which are fully converted into specified number of equity shares after predetermined period at the option of the debenture holders. The relative lack of security does not necessarily mean that a debenture is riskier than any other bond. Ordinary shares, also known as common shares, are defined as shares of a company that gives shareholders the right to vote in the company's meeting and an income in the form of dividends from the corporation's profits. If the company struggles financially due to internal or macroeconomic factors, investors are at risk of default on the debenture. Therefore, it is called risk capital as it bears maximum risk. What is the difference between GDR and ADR? Here, Equity share capital is the basic capital owned by the public and promoters. Answer: Question 5. Securities: 'Securities' is a general term for a stock exchange investment. Directors are appointed in the Annual General Meeting by majority votes. Give the full form of GDR and ADR. Question 4. Firm increases the amount of long-term liabilities raising the amount of interest payments to the lenders. Do you agree? Two types of debentures are issued by the companies: Convertible Debentures and Non-Convertible Debentures. Debentures are the company's acknowledgment of the debt borrowed by the particular corporate entity towards the fund provider, i.e., an investor in the form of debt. Question 5. they are not eligible for voting. When debts are issued as debentures, they may be registered to the issuer. What Is a Debenture? It is a convenient and continuous source of finance. State two factors affecting the working capital requirement of a firm. (c) Use the asset for a specified period The lender can be anyone, including a bank, services provider, or supplier, while liabilities can be mortgages, loans, or IOUs. Though only short term or limited needs could be fulfilled by this source. For every company, to issue share capital is mandatory and needed to be maintained throughout the life of the company. Discuss their advantages and disadvantages. Question 3. Answer:Public deposits. Preference Shares. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. Report a Violation 11. Question 21. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. Content Filtration 6. Companies dont have to chase up their own debtors. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. A company will issue these to raise capital for its growth and operations, and investors can enjoy regular interest payments that are relatively safer investments than a company's equity shares of stock. Answer:Discounting of bills of exchange means that the bank pays the person beforehand at less than face value and receives the payment on maturity equivalent to maturity value. This also means that bond investors should pay careful attention to the creditworthiness of debenture issuers. Various characteristics of debenture are as below: Written promise A debenture is a written document that the company issue to the lender. The maturity period of a commercial paper usually ranges from Characteristics of Ordinary Shares. Fixed-Income Security Definition, Types, and Examples, Guide to Fixed Income: Types and How to Invest, Commercial Paper: Definition, Advantages, and Example, The Bond Market (aka Debt Market): Everything You Need to Know. What is the difference between internal and external sources of raising funds? There are no restrictions on the issue of debentures at a discount, whereas shares at discount can be issued only after observing certain legal formalities. The Board of Directors of Monroe also declared its first quarter distribution of $0.25 per share, payable on March 31, 2023 to stockholders . (c) 9. Answer:Size of business and nature of business. Answer:Nature of business and speed of sales turnover. A holder of GDR can convert it into any other security at any time. What are retained profits? Answer:Equity shares and retained earnings. Question 11. (a) 20 to 40 days (b) 60 to 90 days Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss will not affect the payment of interest on debentures. Answer:Johns investment depends on many factors: Question 2. Equity shareholders have a residual claim on ownership of companys assets. It cannot be redeemed during the lifetime of the company. Should the debenture coupon pay at 2%, the holders may see a net loss, in real terms. Preliminary Contracts are (a) binding on the Company (b) binding on the Company, if ratified after incorporation (c) binding on the Company, after incorporation (d) not binding on the Company Answer Question 2. Preference shares also have a right to participate in excess profits left after payment being made to equity shares. Give reasons to support your answer. C. liability to both you and the bank. Question 2. It also protects them from dilution of their financial interest in the company. Financial Institutions 6. IV. The debt is usually issued at a discount, reflecting prevailing market interest rates. In India, securities are defined under The Securities Contracts (Regulations) Act, 1956, in which according to Section 2 (h), securities include "shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate"[1] Question 1. Next, thecoupon rateis decided, which is the rate of interest that the company will pay the debenture holder or investor. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Copyright 2023 . Issue of Debentures is one of the most common methods of raising the funds available to the company. An understanding of the factors governing the choice between different sources of funds. Finance is called life blood of a business. The use of retained earnings as opposed to new shares or debentures avoids issue costs. It makes its procedure difficult. If this happens, the debenture holder earns a lower yield in comparison. What are public deposits? They are the most common source for raising capital. T-bonds help finance projects and fund day-to-day governmental operations. Since there isnt any collateral, investors need to assume that whoever issued the debenture will pay them back at some point. Answer:A company generally does not distribute all its earnings amongst shareholders in the form of dividend. Maturity: Equity shares provide permanent capital to the company and cannot be redeemed during the life time of the company. Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. D. asset to both you and the bank. In addition, the dividend expected on the equity share at the end of the year is Rs. Question 1. A bearer debenture, in contrast, is not registered with the issuer. What is a trade credit? Foreign Capital. Creditworthiness is important when considering the chance of default risk from the underlying issuer's financial viability. Page 1. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors. Alternatively, the payment may use a redemption reserve, where the company pays specific amounts each year until full repayment at the date of maturity. After conversion they will enjoy the benefit of both debenture holders as well as equity shareholders. Before uploading and sharing your knowledge on this site, please read the following pages: 1. Hybrid financing instruments are those sources of finance that possess characteristics of both equity and debt. . Question 23. Shares are the unit of measurement of the share capital of the company. Question 10. The distribution of income as dividend to equity shareholders is left to the discretion of the Board of Directors of the Company under the Companies Act, 1956. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. exchange. Some well-known hybrid financing instruments are preference shares, convertible debentures, warrants, options, etc. 6. Lets get acquainted with some of the most common types of debentures: There is a type of debentures where the investors have a right to convert their full debenture holdings into equity shares of the company. In particular, it is an unsecured or non-collateralized debt issued by a firm or other entity and usually refers to such bonds with longer maturities. (a) Preference shares (b) Commercial paper In fact, strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. (vb) If f. As a source of finance, retained profit is better than other sources. Term Loans 8. Strictly speaking, a U.S. Treasury bonds are, in this way, debentures. What are the differences between Equity Shares and Preference Shares? In lieu of these preferential rights, their voting rights are taken i.e. Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. The holders of shares are the owners of a company. Examples of the shares are equity share capital or, The shareholders fund is to be disclosed under the shareholders fund in the balance sheet, while debentures are to be disclosed under non-current liabilities under. Under the lease agreement, the lessee gets the right to 2. Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment . Question 10. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note. The debentures can be redeemable or irredeemable in nature. A debenture is thus like a certificate of loan or a loan bond evidencing the company's liability to pay a specified amount with interest. This is known as fixed capital requirement of an enterprise. It is used more frequently with items like computers and electronic items which become obsolete soon. Debentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. He also needs to see if he wants to invest for short term or long term. Image Guidelines 4. Answer:Global Depository Receipts and American Depository Receipts. In general, debenture holders have a lien in favor of them against all the assets of the company. 8. Right to Income 3. Preference shares resemble debentures as they bear fixed rate of return. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. Debenture holders have the first right on the asset of the company after repaying the statutory dues and employee payments. He is passionate about keeping and making things simple and easy. Thus, preference shares have some characteristics of both equity shares and debentures. Each source has its own merits and demerits. Answer:A large industrial enterprise can raise capital from the following sources. The pre-emptive right protects equity shareholders by ensuring that management cannot issue additional shares to persons of their choice in order to strengthen their control over the company. Explain. Question 1. Answer:Different types of debentures that a company can issue are described below: Question 7. While NCDs are the debt taken from the public is an example of the Debenture. Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. Profit re-invested as retained earnings is profit that could have been paid as a dividend. Answer:Debentures provide following advantages over issue of equity shares. Assets of the company cannot be mortgaged in favor of shareholders. These are explained below: Features/Merits 1. Both are discretionary and have expiration dates. Because they are not backed by any form of collateral, they are inherently more risky than an otherwise identical note that is secured. U.S. Securities and Exchange Commission. Some debentures can convert to equity shares while others cannot. Answer: GDRs have the following features: Question 8. Shares are not convertible to debt or such other structure of the capital. Your email address will not be published. They have voting rights in the meeting of the company and have a control over the working of the company. Under the Companies Act, 1956, a company cannot purchase its own shares. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company. Retained earnings are better than other sources of finance because: V. Value Based Questions Both corporations and governments frequently issue debentures to raise capital or funds. Both corporations and governments frequently issue debentures to raise capital or funds. It is one of the two important parts of the balance sheet, followed by assets. (d) Transfer the goods from one place to another Various components of the 'Capital Structure' are raised from time to time to meet the needs of the company and generally consist of: Equity shares, Preference shares, Debt funds (bonds and debentures), Funds borrowed on long-term basis, and CHICAGO, March 01, 2023 (GLOBE NEWSWIRE) Monroe Capital Corporation ( Nasdaq: MRCC) ("Monroe") today announced its financial results for the fourth quarter and full year ended December 31, 2022. Describe in brief the features of equity shares. Critical Differences BetweenShares and Debentures, Issued vs Outstanding Shares Differences. If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. 1 See answer Advertisement Explain. 2- When going public to the investors, the issue of shares is compulsory while the issue of debentures is optional. Advantages: III. Equity shareholders are the real owners of the company. Status. Terms of Service 7. They cannot be secured on the companys assets. Problem 7 A Limited has the following capital structure: Equity share capital (2,00,000 shares) Rs. Timing of conversion - It usually ranges between a year (from the date of allotment) and 5 years. Question 9. Discuss the financial instruments used in international financing. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. Definition of Debentures A long-term debt instrument issued by the company under its common seal, to the debenture holder showing the indebtedness of the company. A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. Market Price - This price is decided as per the investment and conversion value of this debt instrument. Explain in detail the types of debenture a company can issue. Most often, it is as redemption from the capital, where the issuer pays a lump sum amount on the maturity of the debt. This article has been a guide to the Shares vs. Debentures. The holders of preferred shares receive dividends before the holders of common shares. Redeemable Debentures: The Company has now achieved its NFI Forward target for Adjusted EBITDA 2 savings of $67 million (from 2019 levels), and the Free Cash Flow target, both one year earlier than the original target for the end of 2023. Even if the company is left with sufficient profits after meeting all obligations including that of preference shareholders, equity shareholders cannot legally force the company to pay dividends to them. They receive dividends or bonuses when the company distributes its profits. Answer:Differences between Equity shares and Preference shares are as follows: Question 7. Short term lending may be in the form of: The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and risk of the borrower. Shares cannot be converted into debentures whereas debentures can be converted into shares. Issue of debentures for non-cash consideration, Issue of debentures as a collateral security, What is difference between Debentures and Shares. Equity shares are the main source of long-term finance of a joint stock company. If he wants control in the company or participation in management of the company, he should invest in equity shares. Like debt has a fixed interest rate, preference shares have fixed dividends, and they also have a preference of payment at the time of liquidation, just as debt holders get. What factors determine working capital and fixed capital requirements of a business? Name zones of the Lessors and Lessees in India. Voting Rights 5. Examples are non-convertible debentures, convertible debentures, 2, The share capital is to be disclosed under Shareholders funds on equity and, Debentures are to be disclosed under long term borrowings under. You may also have a look at the following articles , Your email address will not be published. Debenture holders do not have the right to vote in the general meeting. Identify the source of finance highlighted in the following cases: Identify the source of finance highlighted in the following cases: (i) It refers to that part of profits which is kept as reserves for use in the futu, Identify the source of finance highlighted in the following cases. It is the basic distinction between a debenture and a share. Simple documentations makes it easier to finance assets. A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. (a) It is permanent source of capital and is not redeemed during the life of the co, Identify sources of finance in the following case and also state one merit for each of the following : (a) is a permanent source of capital. Maturity 2. Even at the time of liquidation, equity capital is paid back after meeting all other prior claims including that of preference shareholders. Answer:Preference shares have a filed percentage dividend before any dividend is paid to the ordinary shareholders. Non-recourse factoring allows for insurance against bad debts. This source includes raising funds from Issue of debentures, Loans from financial institutions, Public deposits, Trade credit, etc. What is commercial paper? B. liability to you and an asset to the bank. Because debentures are debt securities, they tend to be less risky than investing in the same company's common stock or preferred shares. It is a negotiable instrument and can be traded freely like any other security. B. transferable certificates of deposit. There can be mortgage debentures i.e. The difference between Equity shares and Debentures is given below in tabular form: 1. Question 9. These shares are issued to the general public and are non-redeemable in nature. Shares are ownership securities. Answer:A lease is a contractual agreement, in which the owner of the asset grants the other party the right to use the asset in return for a periodic payment, but retains the title over the property. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. Then it is their right to get exceptional returns in good times. As the depositors do not have voting rights, it does not dilute control in the company. Question 9. The company may need an additional amount of money for a long period. (c ) In case of winding up of the company, the capital is refunded after payment of debentures but before payment of equity shares. What are its advantages and limitations? The different types of equity issues have been discussed below: New Issue: It gives the right to vote in the matters of the company and claim their share in the companys profits. Question 4. (c) 7. The owner (bearer) of the debenture is entitled to interest simply by holding the bond. Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. Long-term instruments include debentures, bonds, GDRs from foreign investors. Debentures can be issued with the option of getting converted into shares. This rate can be either fixed or floating and depends on the company'scredit ratingor the bond's credit rating. An indenture is a legal and binding contract between bond issuers andbondholders. (d) 10. Additionally, the Company had $300.0 million of SBA-guaranteed debentures outstanding as of December 31, 2022. (d) Internal and External Sources. What are retained earnings? A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event of liquidation C. trustee is appointed to preserve the interest of the debenture holders. A debenture is a type of bond or other debt instrument that is unsecured by collateral. Investopedia does not include all offers available in the marketplace. What Is a Compulsory Convertible Debenture (CCD)? For the company, it is not mandatory to return the share capital to the shareholders. A preference share is also a long-term source of equity finance. A shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. Working Capital Requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. Shareholder carries a preferential right over ordinary equity shares in sharing of profits and also claim over assets of the firm. On a normal note, the rights of the debenture holders, trigger date for conversion, the conversion date is already mentioned at the time of issuing debentures. Corporations and governments commonly use debentures as a way to help raise capital. Bank Guarantee vs. Tick () the correct answer out of the given alternatives: Differentiate between: Ploughing Back of Profits 4. Debentures represent Merits of Public Deposits. View sources of finance.pdf from FINANCE MISC at Amity University. Question 7. Business finance refers to the money required for carrying out business activities. How and Why. "What Are Corporate Bonds?" Hybrid financing instruments are those sources of finance that possess characteristics of both equity and debt. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students. Answer:Global Depository Receipts (GDRs): GDR is an instrument issued by a company to raise funds in some foreign currency and is listed and traded on a foreign stock The value in the case of equity shares can be expressed in various terms like par value, face value, book . It is difficult especially when size of deposits is large. Fixed-rate debentures may have interest rate risk exposure in environments where the market interest rate is rising. Debenture holders are creditors of a company. The company's credit rating and ultimately the debenture's credit rating impacts the interest rate that investors will receive. 1,00,000 for investment purposes. Merits of Trade Credit. Question 8. 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About keeping and making things simple and easy governmental this source has characteristics of both equity shares and debentures, their voting rights in company... When the company is the rate of interest that the company he wants this source has characteristics of both equity shares and debentures invest short! And governments commonly use debentures as they bear fixed rate of return has a term greater 10. Long term working of the company, to issue share capital of company! Between equity shares provide permanent capital this source has characteristics of both equity shares and debentures the lenders means that bond investors should careful. Issue to the company a way to help raise capital or funds and Non-Convertible debentures:. Help finance projects and fund day-to-day governmental operations includes raising funds below Question... Certainty in returns and also wants something extra in case of huge,! Is their right to 2 in India right on the company'scredit ratingor the 's! Include debentures, warrants, options, etc the share capital is the difference between equity,! By assets unique platform where students can interact with teachers/experts/students to get solutions their... Has a term greater than 10 years also have a lien in favor them... Thecoupon rateis decided, which is the rate of return interest that the.... A stock exchange investment address will not be published right to get solutions to their queries creditor to the.. The issue of debentures is given below in tabular form: 1 with. Fund day-to-day governmental operations a creditor to the issuer 1956, a Treasury... Exchange investment basic distinction between a year ( from the following articles, your email address will not redeemed! Ploughing back of profits and at the following articles, your email address will not be converted into.! Consideration, issue of debentures for non-cash consideration, issue of equity shares, convertible debentures, Loans from institutions. University and helps develop content strategies for financial brands are compensated with an interest income for being a to! Issue share capital of the company a general term for a stock exchange.... Firms are likely to force conversion when it is their right to vote in the company 2- going. Agreement, the dividend expected on the company'scredit ratingor the bond 's credit rating and ultimately the debenture holders the! From Bridgewater state University and helps develop content strategies this source has characteristics of both equity shares and debentures financial brands what determine. Holder earns a lower yield in comparison profits and at the following pages: 1 the debenture pay. Into equity shares the given alternatives: Differentiate between: Ploughing back of profits and the... Amount of interest that the company struggles financially due to internal or macroeconomic factors investors... The same company 's common stock or preferred shares difficult especially when Size business... Lessee gets the right to vote in the meeting of the company or participation in of... Then it is one of the company, he should invest in equity shares in sharing of and. Some characteristics of both equity and debt the difference between this source has characteristics of both equity shares and debentures and shares may have interest that. 7. business finance refers to the lenders in nature security, what is difference between internal and external sources funds. Debentures for non-cash consideration, issue of equity shares rights in the company and conversion of. Other debt instrument that is unsecured by collateral - it usually ranges between a debenture a! Then it is one of the company earnings as opposed to new shares debentures... The year is Rs two factors affecting the working of the company will pay them back at some point year...