Question

You have been asked by the prospective directors of a shortly to be established business what is meant by ordinary shares, preference shares and debt capital. Further, you have been asked to provide a brief explanation of their relative advantages and disadvantages as sources of funds to expand the business. Write an essay to assist these managers. (300 words max)

Answer 1

Ordinary Shares :- Equity shares are also known as the ordinary shares of the company. Equity shares holders are the real owners of the company They Have a right to Vote in the meetings Also on the ordinary shares company is not also need to pay interest as shareholders gets profit in terms of dividend The main benefit is that there is not any liability of equity shareholders on the company. This is the risky capital if in amy case there is a loss in the company then the company is not bind to pay interest or dividend to the companys shareholders. Ordinary shares are the equity shares of the company. Equity share holders are not the employees of the company They are the owners. The profit distrinution is made to equity shareholder after the payment of interest or prefrence dividend means equity share holders gets profit at the end after the payment of all investments

Advantage of ordinary share :- no need to distribute dividend in case of loss

Disadvantages :- They can increase the share holdings of company

Prefrence Shares:- Prefrence Shares are the shares which are not the ordinary shares They have a two prefrences as compared to ordinary shares Similiarly to ordinary shares company is not liable to pay dividend in case of loss

1. prefrence at the time of distribution of Dividend :- As prefrence share holders have a right to take dividend first as compared to share holders

2. Prefence to get money refund at the time of winding up :- As prefrence share holders have to right to take his money refund back before the payment to share holders at the tim eof winding up.

Advantage:- Not need to give dividend in case of loss

Disadvantage:- They also have a right to take part in the meetings of the company

3. Debt capital :- Debt is the liabilty of the company It is of two types one is short term and second is long term. It is the risk free or secured capital as in the case of debt capital company is liable to pay interest to debenture holders even in case company has not earned any profit.

Advantage:- It is a liability of a company If any time company can earn huge profit then the company needs to pay only limited interest amount and also there is a banefit of deduction of interest while calculating corporate tax

Disadvantage:- Company needs to pay interest in case of no profits in the company. Also it increse the liabilty of the firm