Justify the following statements.
1. Equity shareholders are real owners and controllers of company.
Equity shares are ordinary shares.
These are the shares that constitute the major part of the total share of the company. The person holding equity share is known as ‘Equity Shareholder’.
Equity Shareholders are the real owners of the company and bear the ultimate risk associated with ownership.
They are often described as “Real Master of the company. They enjoy control over the company. They have voting rights and can participate in the management of the company.
Thus, it is rightly justified that equity shareholders are the real owners and controllers of the company.
2. Preference shares do not carry any voting right.
Preference Shares are those shares which enjoy certain privileges and preferential rights over equity shares. The person holding preference share is known as ‘Preference Shareholder’.
Preference Shareholders do not have normal voting rights like equity shares.
However, they can vote on any such matter which directly affects their interest as investors.
Thus, it is rightly justified that, preference shares do not carry any voting right.
3. The debentures are secured by charge on assets of the company.
Secured debentures are the debentures which are secured by some charge on the assets or property of the company.
The charge may be either a fixed charge or a floating charge.
In case of a fixed charge, specific assets are mortgaged as security for the debentures.
Under floating charges, the debenture holders have a claim overall assets of the company.
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.
Retained earnings are the earnings of the company which are retained (reinvested) in the business.
The sum of those profits accumulated over years is re-invested in the business, rather than distributing it as a dividend to shareholders.
The company can utilize such reserves for financing various projects such as expansion, diversification, etc.
It is an important source of internal financing. Thus, it is also known as ‘Self Financing’ or ‘Ploughing Back of Profits’.
Thus, it is rightly justified that, retained earnings is the simple and cheapest method of raising finance.
5. Public deposit is good source of short term financing.
Public deposits are an important source of financing short term requirements of the company. In other words, the company accepts public deposits for meeting short term needs.
When companies generally receive deposits from the public for the period ranging from 6 months to 36 months, it is known as ‘Public Deposits’.
It is considered a risky investment but investors can earn a high return on public deposits. Deposits are either secured or unsecured loans offered by the company.
Thus, a public deposit is a good source of short term financing
6. Bond holder is creditor of the company.
A bond is a debt security. It is a loan. A bond is a formal contract to repay the borrowed money with interest.
It is an interest bearing certificate issued by the government, semi-government, or business firms to raise capital.
The person holding such an instrument is known as a bond holder. He becomes the creditor of the company.
As a bond holder is the creditor of the company, he does not enjoy any voting rights and cannot participate in the management of the company.
Thus, it is rightly justified that, the bond holder is a creditor of the company
7. Trade credit is not cash loan.
Trade Credit refers to the facilities or credit extended by the manufacturer, wholesalers, and suppliers of goods to the purchaser but receives payment after the credit period from the date of purchase.
Manufacturer, wholesalers, and suppliers of goods or materials are called “Trade Creditors’
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 sales take place.
This practice is done by a business concern with an intention to increase its sales or turnover, generate additional business and maintain a good relationship with the purchasers.
Thus, it is rightly justified that, trade credit is not a cash loan.
8. Different investors have different preferences.
The investors are the persons who invest the capital in the company. They can invest in equity share capital or preference share capital.
The investors who can take the risk, invest in equity shares. They are known as the ultimate risk bearer.
The investors who are cautious, conservative, interested in the safety of capital, generally invest in preference shares.
Thus, it is rightly justified that, different investors have different preferences.
9. Equity share capital is risk capital.
The person holding equity share capital is known as ‘Equity Shareholder’.
The dividend received by equity shareholders is fluctuating. Also, if a company does not earn profit in a particular year then equity shareholders will not get any dividend.
Hence, Equity shareholders bear the maximum risk in the company. They are described as ‘Shock absorbers’ when a company has a financial crisis.
Thus, it is rightly justified that, equity share capital is risk capital.