Study the following case / situation and express your opinion.
(1) The Balance-sheet of a Donald Company 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 ?
b) Can the retained earnings be converted into capital ?
c) What type of source retained earning is ?
a) As per the Balance Sheet of a Donald Company, it has sufficient equity share capital and retained earnings. Thus, the company is financially sound. There is no financial problem of the company.
b) Yes. the Company has a sufficient amount of retained earnings. Therefore, the retained earnings of the company can be converted into capital.
c)Retained earnings is owned or internal source of financing. Every year the company keeps aside some part reserve out of profit which is used by the company. Thus, retained earnings is also known as ‘ploughing back of profit.
(2) Mr. Satish is a speculator. He desires to take advantage of growing market for company’s product and earn handsomely.
a) According to you which type of share Mr. Satish will choose to invest ?
b) What does he receive as return on investment ?
c) State any one right which he will enjoy as a shareholder.
a) According to me, Mr. Satish should invest in Equity shares. So that he can take the overall benefit of the profits and also enjoy all the rights and can participate in the management of the company.
b) He may receive the dividend as a return on investment. But, the dividend received by the equity shareholder is fluctuating. It depends on the profit of the company.
c) The right which he will enjoy as a shareholder are as follows:
Right to vote: It is the basic right of equity shareholders through which they elect directors, alters Memorandum and Articles of Association, etc.
Right to share in profit: It is an important right of equity shareholders. They have the right to share in profit when distributed as dividends.
Right to inspect books: Equity shareholders have the right to inspect statutory books of their company.
Right to transfer shares: Equity shareholders enjoy the right to transfer the shares as per the procedure laid down in the Articles of Association.
(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.
b) What does he receive as return on his investment ?
c) The return on investment which he receives is fixed or fluctuating ?
a) 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. So according to me, he should opt for preference shares.
b) He will receive the dividend as a return on investment. The dividend received by preference shareholders is fixed. They get dividends prior to equity shareholders.
c) Return on investment on preference shares is always fixed, regular, and steady. But they don’t have the right to participate in the management of the company. Only equity shareholder has the rights as they are the real owner of the company.