Question

Naveed SAOG finances their all projects by using both owned and borrowed capital. It includes the following combination:

1. Ordinary shares 10000 shares of OMR 5.100 each

2. 8%-Debentures 15000 debentures of OMR 10.500 each

(Q) Identify the differences between owned capital and borrowed capital by referring to the information above and other sources of owned capital and borrowed capital

Answer 1

Answer:

Owned capital : Capital that the organization owns and there is no fixed obligation appended this capital .Equity shares,preference shares are the examples of owned capital.

Borrowed/Acquired capital: Capital organized from outside the firm for a fixed liability which is an debt. Bank loans ,debentures are the examples of borrowed capital.

Difference between Owned capital and Borrowed capital:

• In Owned capital , no need to pay a fixed pace of return, But acquired capital, fixed pace of interest must be paid.
• In the event that Profit is higher,Ordinary shareholders will get better return, No such return is accessible to acquired/borrowed capital.
• Different sources of owned capital is the held profit/retained earnings, again no fixed rate of return to borrowed capital.
• Bills Payable, Bank loan and so on are other acquired capital. Again fixed payment required.
• In borrowed capital, the fiscal risk is higher compared to owned capital.
• Owned capital represents possession, obtained capital represents liability.
• Owned capital return is called Dividend/profit, obtained capital return is called interest.
• Owned capital is permanent, obtained capital must be reimbursed within particular period.