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    11 Bstudies

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    By napit

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    11-BSTUDIES

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    By napit

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2 views5 pages

    11 Bstudies

    Uploaded by

    surajrahul028
    By napit

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    © All Rights Reserved
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    of 5

    Class Notes

    Class: XI Topic- Sources of Business Finance

    Subject: Business Studies

    Preference Shares:

    Preference shares are shares having preferential rights to claim dividends during the lifetime of the
    company and to claim repayment of capital on wind up. In case of preference shares, the percentage
    of dividend is fixed i.e. the holders get the fixed dividend before any dividend is paid to other classes
    of shareholders.

    Features of preference shares:

    1. Preference shareholders get fixed rate of dividend.

    2. They get preferential position over equity share capital with respect to payment of
    dividends and repayment of capital at the liquidation of the company.

    3. They do not have voting rights.

    4. The issue of Preference shares does not create any charge on the assets of the company.

    5. Preference shares are an important source of long term finance.

    Merits of Preference share Capital

     It is suitable for investors who want security and safety of returns on money
    invested as preference shares carry a fixed rate of dividends.
     Preference shareholders enjoy preferential right of repayment of capital in the
    event of liquidation of company.
     Preference shareholders get preference of dividend payment over equity
    shareholders.
     Issue of Preference shares does not dilute the control of equity shareholders
    over the management of the company as they do not have voting rights.
     Preference share capital does not create any charge on the assets of the
    company therefore the assets may be use to raise long term loans.
     It is beneficial for the equity shareholders as higher dividends may be
    declared for them in times of higher profits.
    Demerits of Preference Share Capital

     It is not suitable for those investors who are ready to take risk and need
    higher returns.
     The issue of preference shares dilutes the control of equity shareholders over
    the assets of the company.
     The rate of dividend of preference shareholders is fixed, hence in times of
    higher profits they do not get any benefit.
     Preference shareholders do not have voting rights hence they do not have
    any say in the management of the company.
     Dividend on these shares is paid only when the company earns profit. Hence
    there is no assured return for the investors.

    Types OR Classes of Preference Shares

    (a) With Reference to Dividend:

    1. Cumulative Preference shares: Cumulative preference shares are these


    preference shares, the holders of which are entitled to receive arrears of
    dividend before any dividend is paid on equity shares.

    2. Non-cumulative Preference shares: Non-cumulative preference shares


    are those preference share, the holders of which do not have the right to
    receive arrear of divided. If no dividend is declared in any year due to any
    reason. Such shareholders get nothing, nor can they claim unpaid dividend
    in any subsequent years.

    (b) With Reference to Participation

    1. Participating preference shares: such shares, in addition to the fixed


    preference dividend, carry a right to participate in the surplus profit, if any,
    after providing dividend at a stipulated rate to equity shareholders.

    2. Non-Participating preference shares: Such shares get only a fixed rate of


    dividend every year and do not have a right to participate in the surplus
    profit.

    (c) With Reference to Convertibility

    1. Convertible preference shares: are those preference shares which have


    the right/option to be converted into equity shares.
    2. Non-convertible preference shares: are those preference shares which
    do not have the right/option to be converted into Equity shares.

    (d) With Reference to Redemption

    1. Redeemable preference shares: are those preference shares the amount


    of which can be redeemed by the company at the time specified for their
    repayment or earlier.

    2. Irredeemable preference shares: are those preference shares the amount


    of which cannot be refunded by the company unless the company is wound
    up. Now a company cannot issue irredeemable preference shares.

    Distinction between Equity Share and Preference Share

    Basic Equity Share Preference share

    On Winding up, the equity share On winding up, the preference Share
    capital is paid after the preference capital is paid before the Equity share
    1. Refund of
    share capital is paid or equity capital is paid or preference shareholder
    capital
    shareholder received residual have preference to get refund of capital
    amount. over Equity shareholders.

    Dividend is paid on Equity shares Dividend is paid on Preference share


    2. Right of
    after payment of dividend on before payment of dividend on Equity
    dividend
    preference shares. shares.

    Suitable for those investors who


    Suitable for those investors who want
    3. Suitability are ready to take risk for higher
    steady income.
    returns

    In normal course of business,


    Equity shareholder have the right
    preference shareholders do not enjoy
    4. Right to to vote in meeting of shareholders
    the right to vote in the meetings of
    Vote and they elect director for
    shareholders. But they have it only in
    managing the company.
    special circumstances

    Equity share are not redeemable,


    however, a company may buy Preference share are always
    5.
    back its equity shares as condition redeemable, now a company cannot
    Redemption
    prescribed in section 68 of the issue irredeemable preference shares.
    Companies Act, 2013
    Debentures

    Debenture: It is a document issued by a company under its common seal


    acknowledging the debt and it also contains the terms of repayment of debt and
    payment of interest at a specified rate.

    Features:

     Debenture holders are the creditors of the company carrying a fixed rate of
    interest.
     Interest payable on a debenture is a charge against profit and hence it is a
    tax deductible expenditure.
     Debenture holders do not enjoy any voting right.
     Debenture is redeemed after a fixed period of time.
     Interest on debenture is payable even if there is a loss.

    Merits

     Debenture holders do not have voting rights hence they do not dilute the
    control of equity shareholders over the management of the company.
     Debentures carry a fixed rate of interest. Hence the investment is safe and
    income is steady.
     Debentures are secured loans. Hence they are paid first at the time of
    liquidation of the company.
     Cost of issuing debentures is less as compared to the cost of issuing shares.
     Interest paid on debentures is tax deductible. Hence it is beneficial for the
    company.

    Demerits

     Payment of interest on debenture is compulsory and hence it becomes


    burden if the company incurs loss.
     It creates a charge on the assets of the company. Hence if the company is
    unable to repay its debt the debenture holders may claim the assets of the
    company.
     The rate of interest paid on debentures is higher than the interest paid on
    other borrowings.
     With the issue of debentures the borrowing capacity of the company
    reduces.

    Types of Debentures:

    Convertible Debentures
    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.

    Non-convertible Debentures:

    A non-convertible debenture is a debenture where there is no option for its


    conversion into equity shares. Thus the debenture holders remain debenture
    holders till maturity.

    Registered Debentures:

    Registered debentures are those debentures where names, address, serial


    number, etc., of the debenture holders are recorded in the register book of
    the company. Such debentures cannot be easily transferred to another
    person.

    Unregistered Debentures/ Bearer Debentures

    Unregistered debentures may be referred to those debentures which are not


    recorded in the company’s register book. Such a type of debenture is also
    known as bearer debenture and this can be easily transferred to any other
    person.

    Secured Debentures

    Such debentures create a charge on the assets of the company.

    Unsecured Debentures

    Such debentures do not create a charge on the assets of the company.

    First Debentures

    Debentures which are repaid before other debentures are First Debentures.

    Second Debentures

    Debentures which are repaid after the first debentures are Second
    Debentures.

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