12th Commerce SP Textbook Solutions Chapter 2 (Sources of Corporate Finance) – Maharashtra Board – Free Solution

12th Commerce SP Textbook Solutions Chapter 2

Chapter 2
Sources of Corporate Finance

Q.1 A) Select the correct answer from the options given below and rewrite the statements.

1) _____ is a smallest unit in the total share capital of the company.
a) Debenture
b) Bonds
c) Share

2) The benefit of Depositor Receipt is ability to raise capital in _____ market.
a) National
b) Local
c) International

3) _____ are residual claimants against the income or assets of the company.
a) Bondholders
b) Equity Shareholders
c) Debenture holders

4) _____ participate in the management of their company.
a) Preference shareholders
b) Depositors
c) Equity shareholders

5) _____ shares are issued free of cost to existing equity shareholders.
a) Bonus
b) Right
c) Equity

6) The holder of preference share has right to receive _____ rate of divided.
a) fixed
b) fluctuating
c) lower

7) Accumulated dividend is paid to _____ preference shares.
a) redeemable
b) cumulative
c) convertible

8) The holder of _____ preference shares have right to convert their shares into equity shares.
a) cumulative
b) convertible
c) redeemable

9) Debenture holders are _____ of the company.
a) creditors
b) owners
c) suppliers

10) _____ is paid on borrowed capital.
a) Interest
b) Discount
c) Dividend

11) Debenture holders get fixed rate of _____ as return on their investment.
a) interest
b) dividend
c) discount

12) Convertible debentures are converted into _____ after a specific period.
a) equity shares
b) deposits
c) bonds

13) Retained earnings are _____ source of financing.
a) internal
b) external
c) additional

14) The holder of bond is _____ of the company.
a) secretary
b) owner
c) creditor

15) Company can accept deposits from public, minimum for _____ months.
a) six
b) nine
c) twelve

16) Company can accept deposits from public, maximum for _____ months.
a) 12
b) 24
c) 36

17) A depository receipt traded in _____ is called American Depository receipt.
a) London
b) Japan
c) U.S.A.

Q.1 B) Match the pairs.

Group A	Group B
a) Equity Share Capital	1) Agreement
b) Debenture Trustees	2) Capitalisation of Profit
c) Preference Shareholders	3) Bold Investor
d) Debenture Certificate	4) Venture Capital
e) Bonus Shares	5) Document of Ownership
	6) Capitalisation of Loan
	7) Safe Capital
	8) Instrument of Debt
	9) Trust Deed
	10) Cautious Investor

Answers.
a. 4) Venture Capital,
b. 9) Trust Deed,
c. 10) Cautious Investor,
d. 8) Instrument of debt.,
e. 2) Capitalisation of Profit

Q.1 C) Write a word or a term or a phrase which can substitute each of the following statements.

1) The ‘real masters’ of the company.
Ans: Equity Shareholders

2) A document of title of ownership of shares.
Ans: Share Certificate

3) The holders of these shares are entitled to participate in the surplus profit.
Ans: Participating Preference Shares

4) A party through whom the company deals with debenture holders.
Ans: Debenture Trustee.

5) Name the shareholders who participate in the management.
Ans: Equity Shareholders

6) The value of share which is written on the share certificate.
Ans: Face Value

7) The value of share which is determined by demand and supply forces in the share market.
Ans: Market Value

8) The policy of using undistributed profit for the business.
Ans: Retained Earnings

9) It is an acknowledgment of loan issued by company to depositor.
Ans: Deposit Receipts

10) A Dollar denominated instrument traded in USA.
Ans: American Depository Receipt (A.D.R.)

11) The Depository Receipt traded in country other than USA.
Ans: Global Depository Receipt (G.D.R.),

12) Money raised b company from public for minimum 6 months to maximum 36 months.
Ans: Public Deposits

13) Credit extended by the suppliers with an intention to increase their sales.
Ans: Trade Credit

14) The credit facility provided to a company having current account with bank.
Ans: Overdraft

Q.1 D) State whether the following statements are true or false.

1) Equity share capital is known as venture capital. (True)

2) Equity shareholders enjoy fixed rate of dividend. (False)

3) Equity shareholders are described as ‘shock absorber’ when company has financial crisis. (True)

4) Debenture holders have right to vote at general meeting of the company. (False)

5) Bondholders are owners of the company. (False)

6) Depository bank stores the shares on behalf of GDR holder. (True)

7) Financial institutions underwrite the issue of securities. (True)

8) Cash credit is given against the hypothecation of goods or any security. (True)

9) Trade credit is major source of long term finance. (False)

Q.1 E) Find the odd one.

1. Debenture, Public deposit, Retained earnings.
2. Face value, Market value, Redemption value.
3. Share Certificate, Debenture Certificate, ADR.
4. Trade Credit, Overdraft, Cash Credit.

Q.1 F) Complete the sentences.

1) The finance needed by business organisation is termed as capital.

2) The convertible preference share holders have a right to convert their shares into equity shares.

3) Equity shareholders elect their representatives called Directors.

4) Bonus shares are issued as gift to Equity shareholders.

5) The bond holders are creditors of the company.

6) Depository receipt traded in a country other than USA is called Global Depository Receipt.

7) First Industrial policy was declared in the year 1948.

8) When goods are delivered by supplier to customer on basis of deferred payment it is called as Trade Credit.

Q.1 G) Select the correct option from the bracket.

Group A	Group B
a) Equity shares	1)Fluctuating rate of dividend
b) Preference shares	2) Dividend at fixed rate
c) Debentures	3) Interest at fixed rate
d) Retained earnings	4) Accumulated corporate profit
e) Public Deposit	5) Short-term loan

Q.1 H) Answer in one sentence.

1) What is a share?
Answer: A share is a unit by which the share capital is divided. The total capital of company is divided into small parts and each part is called share and the value of each part/unit is known as face value.

2) What are Equity shares?
Answer: Companies Act defines equity shares as ‘those shares which are not preference shares.
The above definition reveals that :
a) The equity shares do not enjoy preference for dividend.
b) The equity shares do not have priority for repayment of capital at the time of winding up of the company.

3) What are preference shares?
Answer: The shares which carr following preferential rights are termed as preference shares :
a) A preferential right as to payment of dividend during the lifetime of company.
b) A preferential right as to the return of capital in the event of winding up of company.

4) What are retained earnings?
Answer: The process of accumulating corporate profits and their utilisation in business is called retained earnings.

5) What is a debenture?
Answer: The word debenture includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not’.

6) What is a bond?
Answer: A bond is an interest bearing certificate issued b the government or business firm, promising to pay the holder a specific sum at a specified date.’

7) In which country can ADR be issued?
Answer: American Depositoy Receipts (ADR) can be issued in the United States of America (USA).

In which country can GDR be issued?
Answer: Global Depository Receipts (GDR) can be issued in all countries other than USA.

8) What are convertible debentures?
Answer: Convertible debentures give right to holder to convert them into equity shares after a specific period of time. Such right is mentioned in the debenture certificate.

9) What are cumulative preference shares?
Answer: Cumulative Preference Shares are those shares on which dividend goes on accumulating until it is full paid.

Q.1 I) Correct the underlined word/s and rewrite the following sentences.

1) Owned capital is temporary capital. (Permanent)

2) Equity shares get dividend at fixed rate. (Fluctuating)

3) Preference shares get dividend at fluctuating rate. (Fixed)

4) Retained earnings is an external sources of finance. (Internal)

5) Debenture holder is owner of the company. (Creditors)

6) Bond is a source of short term finance. (Long)

7) Depository Receipt traded in USA is called as Global Depository Receipt. (American Depository Receipt)

Q.2 Explain the following terms/concepts.

1. Borrowed Capital.
Answer: Only owned capital is not sufficient to carry on all business activities of a joint stock company. A company needs borrowed capital to supplement its owned capital. Every trading company is entitled to borrow money.

The capital may be borrowed for short, medium or long-term requirements. It is better to raise borrowed capital at a later stage of company’s business, when company want to expand or diversify its business and it requires additional capital. This additional capital can be raised by: a) issue of debentures b) Accepting deposits c) bonds d) Loans from commercial banks and financial institutions, etc. Interest is paid on borrowed capital. It is paid at a fixed rate. Borrowed capital is repayable after a specific period of time.

2. Owned Capital.
Answer: a) The capital raised by company with the help of owners (shareholders) is called owned capital
or ownership capital. The shareholder’s purchase shares of the company and supply necessary capital. It is one form of owned capital.
b) Another form of owned capital is retained earnings. It is also known as ploughing back of profit. It is a reinvestment of profit in the business by the company itself. Retained earnings is an internal source of finance.
c) Owned capital is regarded as permanent capital, as it is returned only at the time of winding up of the company.

3. Ploughing back of profit.
Answer: Business organizations are subject to variation in earnings. It would be a wise decision to keep aside a part of earning during a period of high profit. A prudent company does not distribute the entire profit earned among shareholders. A part of profit is retained by company in the form of reserve fund. These reserves are the retained earnings of the company. The sum total of retained earnings gets accumulated over the years. These accumulated profits are reinvested in the business rather than distributed as dividend.

”The process of accumulating corporate profits and their utilization in business is called retained earnings.”

In simple words, a part of net profit, which is not distributed to shareholders as dividend is retained by company in the form of ‘Reserve Fund’. The company converts it’s reserves into ‘bonus share capital’ and capitalises it’s profit. This capitalization of profit b issue of bonus shares is known as ploughing back of profit or self-financing.

4. Overdraft.
Answer: A company having current account with bank is allowed overdraft facility. The borrower can withdraw funds as and when needed. He is allowed to overdraw on his current account, up to the credit limit which is sanctioned b bank. Within this stipulated limit any number of drawings are permitted. Repayments can be made whenever required during the time period. The interest is determined on the basis of actual amount withdrawn.

5. Trade Credit.
Answer: No business can be run without ‘credit’. Credit is the soul of business. Trade credit financing is major source of short term financing.

Manufacturers, wholesalers and suppliers of goods or materials are called ‘trade creditors’. They sell tangible goods to other business concerns on the basis of deferred payment i.e. future payment credit is extended by these business concerns with an intention to increase their sales. The business firm extends credit, also because of custom that has been built up overtime.

Trade credit is not cash loan. It results from a credit sale of goods/services, which has to be paid at a future date after the sale takes place. In other words, when goods are delivered by supplier to a customer and the payment is made after some time, it is called as trade credit.

Q.3 Study the following case/situation and express your opinion.

(1) The Balance sheet of a Donald Compan for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and retained earnings of Rs. 50,00,000.

a) Is the company financially sound?
Answer: Yes, the company is financially sound. Because its retained earnings is double of equity shares.

b) Can the retained earnings be converted into capital?
Answer: Yes, retained earnings be converted into capital by issuing bonus shares to equity shareholders.

c) What type of source retained earning is?
Answer: Retained earnings is an internal source of funds.

(2) Mr. Satish is a speculator. He desires to take advantage of growing market for company’s products and earn handsomely.

a) According to you which type of share Mr. Satish will choose to invest?
Answer: According to me, Mr. Satish should choose to invest in Equity shares of the company.

b) What does he receive as a return on investment?
Answer: He receives dividend as a return on investment.

c) State any one right which he will enjoy as a shareholder.
Answer: Right to vote: It is the basic right of equity shareholders through which the elect directors, alter Memorandum and Articles of Association, etc.

(3) Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. He is interested in definite rate of income and safety of principal.

a) Name the type of security that Mr. Rohit will opt for.
Answer: Mr. Rohit should opt for preference shares issued by the company.

b) What does he receive as return on his investment?
Answer: He receives dividend as a return on investment.

c) The return on investment which he receives is fixed or fluctuating?
Answer: The return on investment which he receives is fixed.

Balbharti Textbook Solutions for other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8 – 9 – 10 – 11 – 12

Q.4 Distinguish between the following.

1) Equity shares and Preference shares.

Points	Equity shares	Preference shares
1) Meaning	Shares that are not preference shares are called equity shares i.e. these shares do not have preferential right for payment of dividend and repayment of capital.	Preferences shares are Shares that carry preferential rights as to payment of : a) Dividend and b) Repayment of capital.
2) Rate of Dividend	Equity shares are given dividend at a fluctuating rate depending upon the profits of the company.	Preference shareholders get dividend at a fixed rate.
3) Voting Right	Equity shareholders enjoy normal voting rights. They participate in the management of their company.	Preference shareholders do not enjoy normal voting right. They can vote only on matters affecting their interest.
4) Return of Capital	Equity capital can not be returned during the lifetime of the company. (except in case of buyback)	A company can issue redeemable preference shares, which can be repaid during the lifetime of the company.
5) Nature of capital	Equity capital is known as ‘Risk Capital.’	Preference capital is ‘Safe Capital’ with stable return.
6) Nature of investor	The investors who are ready to take risk invest in equity shares.	The investors who are cautious about safety of their investment, invest in preference shares.
7) Face value	The face value of equity shares is generally Rs 1/- or Rs 10/- it is relatively low.	The face value of preference shares is relatively higher i.e. 100/- and so on.
8) Right and bonus issue	Equity shareholder is entitled to get bonus and right issue.	Preference shareholders are not eligible for bonus and right issue.

2) Shares and Debenture.

Points	Shares	Debenture
1) Meaning	A share is a part of share capital of a company. It is known as ownership securities.	A debenture is a certificate of loan taken by a company. They are also known as creditorship securities.
2) Status	A holder of shares is the owner of company. Therefore share capital is owned capital.	A holder of debenture is creditor of the company. Debenture capital is loan capital or borrowed capital.
3) Nature	It is permanent capital. It is not repaid during the lifetime of the company.	It is temporary capital. Generally it is repaid after a specific period.
4) Voting right	Shareholders being owners enjoy normal voting rights in general meeting. They participate in the management of the company.	Debenture holders being creditors, do not have any voting rights. They can not participate in the management of the company.
5) Return on Investment	Return on shares is called dividend. Equity shareholders receive divided at a fluctuating rate whereas preference shareholders receive divided at fixed rate.	Return on debenture is called interest. It is fixed at the time of issue. Interest is paid even when company has no profit.
6) Security	Share capital is unsecured capital. No security is offered to the shareholder.	Debenture capital being loan capital is secured by creating a charge on Company’s property.
7) Time of Issue	Shares are issued in the initial stages of the company formation.	Debentures are issued at a later stage, when the company has properties to offer as security.
8) Suitability	Shares are suitable for long term finance.	Debentures are suitable for medium-term finance.

3) Owned capital and borrowed capital.

Points	Owned capital	Borrowed capital
1) Meaning	It is that capital that is contributed by shareholders.	It is that capital that is borrowed from creditors. It is also known as debt capital.
2) Sources	This capital is collected by issue of equity shares and preference shares.	It is collected by way of issue of debentures, fixed deposits, loan from bank/financial institutions, etc.
3) Return on Investment	The shareholders get dividend as income on their investment. Rate of dividend is fluctuating in case of equity shares but fixed in case of preference shares.	The debt capital holders get interest as income on their investment. Interest is paid at a fixed rate.
4) Status	The shareholders are owners of the company.	The debt holders are creditors of the company.
5) Voting right	The equity shareholders enjoy normal voting right at the general meeting.	The creditors do not enjoy voting rights at the general meeting.
6) Repayment of Capital	The shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of winding up of the company.	The creditors get priority over the shareholders in case of return of principal amount at the time of winding up of the company.
7) Charge on assets	The shareholders do not have any charge on the assets of the company.	The secured debenture holders have a charge on assets of the company.

Q.5 Answer in brief.

1) What is public deposit?

Answer: a) Public deposit is an important source of financing short-term requirements of company. Companies receive fixed deposits from the public for a period ranging from 6 months to 36 months. Such deposits are called as Public Deposits.

b) Under this method, general public is invited to deposit their savings with the company for varied period. Interest is paid by companies on such deposits. The company issues ‘Deposit Receipt’ to depositor. The terms of deposit are mentioned in the ‘Deposit Receipt’. Deposit Receipt is an acknowledgment of debt/loan by the company. Deposits are either secured or unsecured loans offered to the company.

c) As per section 2 (31) of Companies Act, 2013, ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

d) The above expression has been further elaborated b Rule 2 (1)(c) of Companies (Acceptance of Deposits) Rules 2014. This Rule provides that ‘deposit’ means any receipt of money, in the form of deposit or loan by a company.

e) However, ‘deposit’ does not include the following:

1. Any amount received from Central Government or a State Government.
2. Any amount received as loan from any banking company.
3. Any amount received from foreign government or international banks.
4. Any amount received by a company from any other company.
5. Any amount raised by issuing commercial paper.
6. Any amount raised by issue of bonds.
7. Any amount received in trust.
8. An amount received by way of subscription to any shares or debentures.

2) What is Global Depository Receipt?

Answer: a) In India, the shares of public company are listed and traded on various stock exchanges like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

b) With adoption of free economic policy and due to globalization some of the Indian company’s shares are also listed and traded on foreign stock exchanges like New York Stock Exchange (NYSE) or National Association of Securities Dealer Automated Quotation (NASDAQ).

c) To list shares on these stock exchanges, company has to comply with policies of those stock exchanges. The policies of these stock exchanges are different than the policies of Indian Stock Exchanges. Therefore, those Indian companies which can not list their shares directly on foreign stock exchanges, get listed indirectly using ADR and GDR

d) ADR and GDR are Dollar/Euro denominated instruments traded in USA and Europe Stock Exchanges.

e) Indian Company issues shares to an intermediary called ‘Depository’. Bank of New York, Citigroup etc. act as foreign Depositor Bank. This Depositor bank issues ADR and GDR to investors against these shares. The ADR / GDR represents fixed number of shares. These ADR / GDR are then sold to people in a foreign country. The ADR / GDR are traded like regular shares. They are listed on stock exchanges. The prices fluctuate depending on demand and supply.

f) Both ADR and GDR are depositor receipts, but only difference is the location where they are traded. If the Depositor Receipt is traded in USA, it is called American Depositor Receipts (ADR) and if it is traded in a country other than USA is called Global Depository Receipts (GDR).

g) Non-Resident Indians (NRI) and Foreign nationals can invest their money in India by purchasing ADR and GDR. They can buy ADR / GDR using their regular equity trading Account.

h) The company pays dividend in home currency to the depository bank and the depository bank converts it into the currency of investor and pays dividend.
The exchanges on which GDR is traded are as follows :
1) London Stock Exchange.
2) Luxembourg Stock Exchange.
3) NASDAQ Dubai.
4) Singapore Stock Exchange.
5) Hongkong Stock exchange.

3) What is trade credit?

Answer:
a) No business can be run without ‘credit’. Credit is the soul of business. Trade credit financing is a major source of short-term financing.

b) Manufacturers, wholesalers, and suppliers of goods or materials are called ‘trade creditors’. They sell tangible goods to other business concerns on the basis of deferred payment i.e. future payment credit is extended by these business concerns with the intention of increasing their sales. The business firm extends credit, also because of custom that has been built up over time.

c) Trade credit is not a cash loan. It results from a credit sale of goods/services, which has to be paid at a future date after the sale takes place. In other words, when goods are delivered by a supplier to a customer and the payment is made after some time, it is called as trade credit.

d) In distributive trade this kind of credit has great significance. The small retailers, to large extent rely on obtaining trade credit from suppliers. It is an easy kind of credit that can be obtained without signing any debt instrument. It is readily available and is a cheap method of financing.

e) Suppliers sell goods and willingly allow 30 days or more, for bills to be paid. They even offer discounts, if bills are cleared within a short period such as 10 days or 15 days, etc. The terms of trade credit are not rigid.

4) What are the schemes for disbursement of credit by banks?

Answer:
Banks have introduced man innovative schemes for the disbursement of credit. They are as follows

a) Overdraft: A company having a current account with bank is allowed overdraft facility. The borrower can withdraw funds as and when needed. He is allowed to overdraw on his current account, up to the credit limit which is sanctioned by bank. Within this stipulated limit any number of drawings are permitted. Repayments can be made whenever required during the time period. The interest is determined on the basis of actual amount withdrawn.

b) Cash Credit: It is also an important and popular form of financial aid. This form of credit is operated in same manner as overdraft facility. The borrower can withdraw amount from his cash credit account up to a stipulated limit based on security margin. Cash credit is given against pledge or hypothecation of goods or by providing alternative securities. Interest is charged on outstanding amount borrowed and not on the credit
limit sanctioned.

c) Cash loans: Under this, the total amount of loan is credited b bank to the borrowers account. Interest is payable on actual balance outstanding.

d) Discounting bills of exchange: The drawer of the bill i.e. (seller) can receive money from drawee (i.e. buyer) on due date or after the due date. A drawer can receive money before due date by discounting the bill with the bank. This is nothing but selling the bill to the bank. The bank gives money to drawer less than the face value of the bill. Thus bill of exchange is trade bills. They are accepted by bank and cash is advanced against them.

5) State the features of Bonds?

Answer:
A bond is debt security. It is a formal contract to repay borrowed money with interest. A bond is a loan. The holder of bond is a lender to the institution. He is a creditor of the company. He gets fixed rate of interest.

All bonds have a maturity date and is paid in cash at a certain date in future.

According to Webster Dictionary, ‘A bond is an interest bearing certificate issued b the government or business firm, promising to pay the holder a specific sum at a specified date.’ Thus a company borrows money and issues bonds as evidence of debt. Interest is payable on bonds at fixed interval or on maturity of bonds.

Features:
a) Nature of Finance: It is debt Finance. It provides long-term finance. The bonds can be issued for longer period i.e. 5 years, 10 years, 25 years, 50 years.

b) Status of bondholder: The bondholders are creditors. Since they are creditors and non-owners they are not entitled to participate in general meetings. They have no voting rights and hence no participation in the management.

c) Return on bonds: The bondholder gets a fixed rate of interest. It is payable at regular intervals or on the maturity of bond.

d) Repayment: Bonds have a specific maturity date on when the principal amount is repaid.

Balbharti Textbook Solutions for other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8 – 9 – 10 – 11 – 12

Q.6 Justify the following statements.

1) Equity shareholders are real owners and controllers of the company.

Answer:
1) Equity shareholders participate in the management of their company.
2) They are invited to attend general meetings.
3) They are allowed to vote on all matters discussed at the general meeting.
4) They elect their representatives called Directors for management of the company.
5) The control of company is vested with the equity shareholders. They are often described as ‘real masters’ of the company.
6) Equity shareholders bear maximum risk in the company.
Hence, Equity shareholders are real owners and controllers of the company.

2) Preference shares do not carry any voting rights.

Answer:
1) Preference shares have certain preferential rights distinct from those attached to equity shares.
2) The preference shareholders are co-owners of the company but not controllers.
3) The preference shares do not have normal voting rights.
4) They have voting rights on any resolution of the company directly affecting their rights.
Hence, Preference shares do not carry any voting rights.

3) The debentures are secured by a charge on assets of the company.

Answer:
1) When company debentures are secured against assets of the concerned company, these are called secured or mortgage debenture.
2) The property of company may be charged as security for loan.
3) The security may be for some particular asset (fixed charge)or it may be the asset in general (floating charge).
4) The debentures are secured through ‘Trust Deed’.
Thus, it is rightly justified that, debentures are secured by a charge on assets of the company.

4) Retained earning is simple and cheapest method of raising finance.

Answer:
1) The process of accumulating corporate profits and their utilization in business is called retained earnings.”
2) It is a part of net profit, which is not distributed to shareholders as dividend is retained by company in the form of ‘Reserve Fund’.
3) Company converts its reserves into ‘bonus share capital’ and capitalizes its profit.
4) This capitalization of profit by issue of bonus shares is known as ploughing back of profit or self financing.
5) It is used by established companies. It is an internal source of finance.
6) Thus, it is rightly justified that, Capital structure is composed of owned funds and borrowed funds.

5) Public deposit is good source of short-term financing.

Answer:
1) Public deposit is an important source of financing short term requirements of company.
2) Companies receive fixed deposits from the public for a period ranging from 6 months to 36 months. Such deposits are called as Public Deposits.
3) Deposits are either secured or unsecured loans offered to the company.
4) General public is invited to deposit their savings with the company for a varied period. Interest is paid by companies on such deposits.
Thus, a Public deposit is a good source of short term financing

6) Bondholder is creditor of the company.

Answer:
1) A bond is an interest bearing certificate issued by the government or business firm, promising to pay the holder a specific sum at a specified date.
2) A bond is a debt security. It is a formal contract to repay borrowed money with interest.
3) Thus a company borrows money and issues bonds as evidence of debt.
4) Interest is payable on bonds at a fixed interval or on maturity of bonds.
5) The holder of bond is a lender to the institution. He gets a fixed rate of interest.
Thus, the Bondholder is creditor of the company.

7) Trade credit is not a cash loan.

Answer:
1) When goods are delivered by a supplier to a customer and the payment is made after some time, it is called
as trade credit.
2) Manufacturers, wholesalers, and suppliers of goods or materials are called ‘trade creditors’.
3) They sell tangible goods to other business concerns on the basis of deferred payment i.e. future payment credit is extended b these business concerns with an intention to increase their sales.
4) Trade credit is not a cash loan. It results from a credit sale of goods/services, which has to be paid at a future date after the sale takes place.

8) Different investors have different preferences.

Answer:
1) The investors are the person who invests in the company. They can invest in the Equity and Preference Share capital.
2) The investors who are ready to take the risk, can invest in Equity shares. The owners of equity shares are real risk bearers.
3) Cautious investors who are interested in the safety of investment and who want steady returns on investments, can invest in Preference Shares.
4) Thus, it is rightly justified that, Different investors have different preferences.

9) Equity share capital is risk capital.

Answer:
1) Equity shareholders own the company and bear ultimate risk associated with the ownership.
2) Equity shareholders do not enjoy preferential rights in respect of payment of dividend.
3) Similarly, at the time of winding up of the company, the equity shareholders are paid last.
4) Equity shareholders do not carry any fixed commitment of dividend. They are paid dividend at the rate recommended by Board of Directors.
5) If There is no profit, no dividend will be payable.
6) If the company is successful, they enjoy great financial rewards and if the company fails, the risk falls mainly on them.
Thus, Equity share capital is risk capital.

Balbharti Textbook Solutions for other subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8 – 9 – 10 – 11 – 12

Q.7 Answer the following questions.

1) What is share and state its features? (Short Code for Initials – Vah Kya IMPORTED )

Answer:
Shares:
The term share is defined by Section 2 (84) of the Companies Act 2013, ‘Share means a share in the share capital of a company and includes stock’. A share is a unit by which the share capital is divided. The total capital of the company is divided into small parts and each part is called share and the value of each part/unit is known as face value. A share is a small unit of the capital of a company. It facilitates the public to subscribe to the
capital in smaller amounts.

Features of Shares

1) Meaning:

Share is the smallest unit in the total share capital of a company.

2) Ownership:

The owner of the share is called a shareholder. It shows the ownership of a shareholder in the company.

3) Distinctive Number:

Unless dematerialized, each share has a distinct number for identification. It is mentioned in the Share Certificate.

4) Evidence of title:

A share certificate is issued by a company under its common seal. It is a document of title of ownership of shares. A share is not any visible thing. It is shown by share certificate or in the form of Demat share.

5) Value of a Share:

Each share has a value expressed in terms of money. There may be :
(a) Face value: This value is written on the share certificate and mentioned in the Memorandum of Association.
(b) Issue price: It is the price at which a company sells its shares.
(c) Market Value: This value of a share is determined by demand and supply forces in the share market.

6) Rights:

A share confers certain rights on its holder such as the right to receive dividends, the right to inspect statutory books, the right to attend shareholders’ meetings, and right to vote at such meetings, etc.

7) Income:

A shareholder is entitled to get a share in the net profit of the company. It is called a dividend.

8) Transferability:

The shares of a public limited company are freely transferable in the manner provided in the Articles of Association.

9) Property of Shareholder:

Share is a movable property of a shareholder.

10) Kinds of Shares:

A company can issue two kinds of shares :
(a) Equity shares. (b) Preference shares.

2) What is an equity share? Explain its features.

Answer:
Equity shares are also known as ordinary shares.
Companies Act defines equity shares as ‘those shares which are not preference shares.
The above definition reveals that :
a) The equity shares do not enjoy a preference for the dividend.
b) The equity shares do not have priority for repayment of capital at the time of winding up of the company.
Equity shares are a fundamental source of financing business activities. Equity shareholders own the company and bear the ultimate risk associated with the ownership.

Features of Equity Shares

1) Permanent Capital:

Equity shares are irredeemable shares. The amount received from equity shares is not refundable by the company during its lifetime. Equity shares become refundable only in the event of the winding up of the company or company decides to buy back shares.

2) Fluctuating Dividend:

Equity shares do not have a fixed rate of dividend. The rate of dividend depends upon the amount of profit earned by the company. If the company earns more profit, the dividend is paid at a higher rate. On the other hand, if there is insufficient profit or loss, the Board of Directors may postpone the payment of dividends. The equity shares get dividends at fluctuating rates.

3) Rights:

Equity Shareholders enjoy certain rights :
a) Right to vote: It is the basic right of equity shareholders through which they elect directors, alter Memorandum and Articles of Association, etc.
b) Right to share in profit: It is an important right of equity shareholders. They have right to share in profit when distributed as dividends.
c) Right to inspect books: Equity shareholders have right to inspect statutory books of their company.
d) Right to transfer shares: The equity shareholders enjoy the right to transfer shares as per the procedure laid down in the Articles of Association.

4) No preferential right:

Equity shareholders do not enjoy preferential right in respect of payment of dividend. They are paid dividend only after dividend on preference shares has been paid.

Similarly, at the time of winding up of the company, the equity shareholders are paid last. Further, if no surplus amount is available, equity shareholders will not get anything.

5) Controlling power:

The control of the company is vested with the equity shareholders. They are often described as ‘real masters’ of the company. It is because they enjoy exclusive voting rights. The Act provides the right to cast vote in proportion to shareholding. They can exercise their voting right by proxies, without even attending meetings in person.

6) Risk:

Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when company has a financial crisis. If the income of company falls, the rate of dividend also comes down.

7) Residual claimant:

Equity shareholders as owners are residual claimants to all earnings after expenses, taxes, etc. are paid. A residual claim means the last claim on the earnings of the company. Although equity shareholders come last, they have the advantage of receiving entire earnings that are left over.

8) No charge on assets:

The equity shares do not create any charge over assets of the company.

9) Bonus Issue:

Bonus shares are issued as gifts to equity shareholders. These shares are issued free of cost to existing equity shareholders. These are issued out of accumulated profits. Bonus shares are issued in proportion to the shares held.

10) Right Issue:

When a company needs more funds for expansion purpose and raises further capital by issue of shares, the existing equity shareholders may be given priority to get newly offered shares. This is called ‘Right Issue’. The shares are offered to equity shareholder first, in proportion to their existing shareholding.

11) Face Value:

The face value of equity shares is low. It can be generally 10 per share or even 1 per share.

12) Market Value:

The market value of equity shares fluctuates according to the demand and supply of these shares. The demand and supply of equity shares depend on profits earned and dividend declared. When a company earns huge profit, market value of its shares increases. On the other hand, when it incurs loss, the market value of its shares decreases.

3) Define preference shares. What are the different types of preference shares?

Answer:
Preference Shares :
As the name indicates, these shares have certain preferential rights distinct from those attached to equity shares.
The shares which carry following preferential rights are termed as preference shares :
a) A preferential right as to payment of dividend during the lifetime of the company.
b) A preferential right as to the return of capital in the event of winding up of the company.
The holder of preference share has a prior right to receive a fixed rate of dividend before any dividend is paid to equity shares. The rate of dividend is prescribed at the time of issue.

Types of Preference Shares

1) Cumulative Preference Shares:

Cumulative Preference Shares are those shares on which dividend goes on accumulating until it is fully paid. This means, if the dividend is not paid in one or more years due to inadequate profits, then this unpaid dividend gets accumulated. This accumulated dividend is paid when company performs well.

2) Non-cumulative Preference Shares:

Dividend on these shares does not get accumulated. This means, the dividend on shares can be paid only out of profits of that year. The right to claim dividend will lapse, if company does not make profit in that particular year. If dividend is not paid in any year, it is lost forever.

3) Participating Preference Shares:

The holders of these shares are entitled to participate in surplus profit besides preferential dividend. The surplus profit which remains after the dividend has been paid to equity shareholders, up to certain limit, is distributed to preference shareholders.

4) Non-participating Preference Shares:

The preference shares are deemed to be non-participating, if there is no clear provision in the Articles of Association. These shareholders are entitled to fixed rate of divided, prescribed at the time of issue.

5) Convertible Preference Shares:

The holders of these shares have a right to convert their preference shares into equity shares. The conversion takes place within a certain fixed period.

6) Non-convertible Preference Shares:

These shares cannot be converted into equity shares.

7) Redeemable Preference Shares:

Shares which can be redeemed after certain fixed period of time are called redeemable preference shares. A company limited b shares, if authorised by Articles of Association, issues redeemable preference shares. Such shares must be fully paid. These shares are redeemed out of divisible profit only or out of fresh issue of shares made for this purpose.

8) Irredeemable Preference Shares:

Shares which are not redeemable i.e. payable only on winding up of the company are called irredeemable preference shares. As per Section 55(1) of the Companies Act 2013, a company cannot issue irredeemable preference shares.

4) What are preference shares? State its features.

Answer:
Preference Shares :
As the name indicates, these shares have certain preferential rights distinct from those attached to equity shares.
The shares which carry following preferential rights are termed as preference shares :
a) A preferential right as to payment of dividend during the lifetime of the company.
b) A preferential right as to the return of capital in the event of winding up of the company.
The holder of preference share has a prior right to receive a fixed rate of dividend before any dividend is paid to equity shares. The rate of dividend is prescribed at the time of issue.

Features of Preference Shares

1) Preference for dividend:

Preference shares have the first charge on the distributable amount of annual net profit. The dividend is payable to preference shareholders before it is paid to equity shareholders.

2) Preference for repayment of capital:

Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated. It saves preference shareholders from capital losses.

3) Fixed Return:

These shares carry dividend at fixed rate. The rate of dividend is pre-determined at the time of issue. It may be in the form of fixed sum or may be calculated at fixed rate. The preference shareholders are entitled to dividend which can be paid only out of profits. If the directors, in financial crisis, decide not to pay dividend, the preference shareholders have no claim for dividend.

4) Nature of Capital:

Preference shares do not provide permanent share capital. They are redeemed after certain period of time. A company can not issue irredeemable preference shares. Preference capital is generally raised at a later stage, when the company gets established. Preference share capital is safe capital as the rate of dividend and market value does not fluctuate.

5) Market Value:

The market value of preference share does not change as the rate of dividend payable to them is fixed. The capital appreciation is considered to be low as compared with equity shares.

6) Voting rights:

The preference shares do not have normal voting rights. They do not enjoy right of control on the affairs of the company. They have voting rights on any resolution of the company directly affecting their rights e.g.: Change in terms of repayment of capital, dividend payable to them are in arrears for last two
consecutive years, etc.

7) Risk:

The investors who are cautious, generally purchase preference shares. Safety of capital and steady return on investment are advantages attached with preference shares. These shares are boon for shareholders during depression period when interest rate is continuously falling.

8) Face Value:

The face value of preference shares is relatively higher than equity shares. They are normally issued at a face value of Rs. 100/-.

9) Rights or Bonus Issue:

Preference shareholders are not entitled for Rights or Bonus issues.

10) Nature of Investor:

Preference shares attract moderate type of investors. Investors who are conservative, cautious, interested in safety of capital and who want steady return on investment generally purchase preference shares.

5) What is Debenture? Discuss the different types of debentures.

Answer:
Debentures are one of the principal sources of raising borrowed capital to meet long and medium term financial needs.
The term debenture has come from the Latin word ‘debere’ which means to ‘owe’.
The term debenture has not been defined clearly under Companies Act.
Sec 2(30) of the Companies Act 2013, only states that, ‘the word debenture includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not’.

Types of Debentures

1) Secured debentures:

The debentures can be secured. The property of company may be charged as security for loan. The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge). The debentures are secured through ‘Trust Deed’.

2) Unsecured debentures:

These are the debentures that have no security. The issue of unsecured debentures is now prohibited by the Companies Act, 2013.

3) Registered Debentures:

Registered debentures are those debentures on which the name of holders are recorded. A company maintains ‘Register of Debentureholders’ in which the name, address and particulars of holdings of debentureholders are entered.

4) Bearer Debentures:

The names of holders are not recorded on the bearer debentures. Their names do not appear on the ‘Register of Debentureholders’. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to debenture certificate.

5) Redeemable Debentures:

Debentures are mostly redeemable i.e. Payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at fixed date at the end of specific period or by installment during the life time of the company. The provision of repayment is normally made in ‘Trust Deed’.

6) Irredeemable Debentures:

These kind of debentures are not repayable during life time of the company. The are repayable only after the liquidation of the company, or when there is breach of any condition or when some contingency arises.

7) Convertible Debentures:

Convertible debentures give right to holder to convert them into equity shares after a specific period of time. Such right is mentioned in the debenture certificate. The issue of convertible debenture must be approved by special resolution in general meeting before they are issued to public.

8) Non-convertible Debentures:

Non-convertible debentures are not convertible into equity shares on maturity. These debentures are redeemed on maturity date. These debentures suffer from the disadvantage that there is no appreciation in value.

6) Define Debenture and explain the features of debentures.

Answer:
Debentures are one of the principal sources of raising borrowed capital to meet long and medium-term financial needs.
The term debenture has come from the Latin word ‘debere’ which means to ‘owe’.
The term debenture has not been defined clearly under Companies Act.
Sec 2(30) of the Companies Act 2013, only states that, ‘the word debenture includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not’.

Palmer defines: “A debenture as an instrument under seal evidencing debt, the essence
of it being admission of indebtedness.”

Features of debentures

1) Promise:

Debenture is a promise by company that it owes specified sum of money to holder of the debenture.

2) Face Value:

The face value of debenture normally carries high denomination. It is 100 or in a multiple of 100.

3) Time of Repayment:

Debentures are issued with the due date stated in the debenture certificate. The principal amount of debenture is repaid on maturity date.

4) Priority of Repayment:

Debenture holders have a priority in repayment of debenture capital over the other claimants of company.

5) Assurance of Repayment:

Debenture constitutes a long-term debt. They carry an assurance of repayment on due date.

6) Interest:

A fixed rate of interest is agreed upon and is paid periodically in case of debentures. Payment of interest is a fixed liability of the company. It must be paid by company irrespective of the fact, whether the company makes profit or not.

7) Parties to Debentures:

a) Company: This is the entity which borrows money.
b) Trustees: A company has to appoint Debenture Trustee if it is offering Debentures to more than 500 people. This is a part through whom the company deals with debenture holders. The company makes an agreement with trustees, it is known as Trust Deed. It contains the obligations of company, rights of debenture holders, powers of Trustee, etc.
c) Debenture holders: These are the parties who provide loan and receive, ‘Debenture Certificate’ as evidence.

8) Authority to issue debentures:

According to the Companies Act 2013, Section 179 (3), the Board of Directors has the power to issue debentures.

9) Status of Debentureholder:

Debentureholder is a creditor of the company. Since debenture is a loan taken by company, interest is payable on it at fixed rate, at fixed interval until the debenture is redeemed.

10) No Voting Right:

According to Section 71 (2) of the Companies Act 2013, no company shall issue any debentures carrying any voting right. Debenture holders have no right to vote at general meeting of the company.

11) Security:

Debentures are generally secured by fixed or floating charge on assets of the company. If a company is not in a position to make payment of interest or repayment of capital, the debenture holder can sell off charged property of the company and recover their money.

12) Issuers:

Both private company and public limited company can issue debentures.

13) Listing:

Debentures must be listed with at least one recognised stock exchange.

14) Transferability:

Debentures can be easily transferred, through the instrument of transfer.

Balbharti Textbook Solutions for Other Subjects
Solution of all Chapters of SP
1 – 2 – 3 – 4 – 5 – 6 – 7 – 8 – 9 – 10 – 11 – 12

12th Commerce SP Textbook Solution

Chapter Name	Solution Link
1) Introduction to Corporate Finance	Click Here
2) Sources of Corporate Finance	Click Here
3) Issue of Shares	Click Here
4) Issue of Debentures	Click Here
5) Deposits	Click Here
6) Correspondence with Members	Click Here
7) Correspondence with Debenture holders	Click Here
8) Correspondence with Depositors	Click Here
9) Depository System	Click Here
10) Dividend Interest	Click Here
11) Financial Market	Click Here
12) Stock Exchange	Click Here

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