Class 12 Secretarial Practice Chapter 2: Sources of Corporate Finance

Key concepts: Sources of Corporate Finance

Owned capital

Capital supplied by the owners of the company: share capital from shareholders and profits ploughed back. It is permanent and returned only when the company is wound up.

Equity shares

Shares that carry no preference for dividend or return of capital. Holders are owners and risk bearers, get a fluctuating dividend, have voting rights and are residual claimants.

Preference shares

Shares with a prior right to a fixed rate of dividend and to return of capital on winding up. Holders normally have no ordinary voting right and are cautious investors.

Retained earnings

Part of profit kept in the business as reserves instead of being paid as dividend. It is an internal source and can be turned into bonus shares (ploughing back of profit).

Debenture

A document by which a company acknowledges a loan. Holders are creditors who get fixed interest whether or not there is profit and have no voting right.

Public deposit and bond

A public deposit is a short-term loan taken from the public for 6 to 36 months against a deposit receipt. A bond is a long-term debt security paying fixed interest.

ADR and GDR

Depository receipts issued by a foreign depository bank against a company's shares, letting it raise equity abroad. ADR is traded in the USA; GDR is traded outside the USA.

Bank finance and trade credit

Banks give overdraft, cash credit, cash loans and bill discounting. Trade credit is deferred payment allowed by suppliers on goods sold and is a cheap, easy short-term source.

Quick revision: important points

• Owned capital: shares and retained earnings. Borrowed capital: debentures, deposits, bonds, ADR/GDR, bank and institutional loans, trade credit.
• Preference shares are always cumulative and non-participating unless the Articles say otherwise; irredeemable preference shares cannot be issued (Sec 55).
• Debentures carry no voting right (Sec 71(2)); a trustee is needed if offered to more than 500 people.
• Public deposits are accepted for 6 to 36 months and acknowledged by a deposit receipt.
• Four groups of institutions: development banks, financial institutions, investment institutions, state level institutions.
• Equity is risk capital; preference is safe capital; debenture holders rank before shareholders on liquidation.

Practice MCQs with answers

1. The capital raised by a company from its shareholders is called

   1. Borrowed capital
   2. Trade credit
   3. Owned capital
   4. Bank finance
   Show answer

   Answer: C. Owned capital
   Money contributed by the owners (shareholders) is owned or ownership capital.

2. Which of the following is an internal source of finance?

   1. Public deposits
   2. Retained earnings
   3. Bonds
   4. Trade credit
   Show answer

   Answer: B. Retained earnings
   Retained earnings come from the company's own profits, so they are internal, while the others are raised from outsiders.

3. The amount of share capital decided by the promoters of a company is called authorised capital. It is stated in the

   1. Prospectus
   2. Articles of Association
   3. Share certificate
   4. Capital clause of the Memorandum of Association
   Show answer

   Answer: D. Capital clause of the Memorandum of Association
   The authorised capital is mentioned in the capital clause of the Memorandum of Association.

4. Which statement about a bondholder is correct?

   1. He is a creditor who gets fixed interest and has no voting right
   2. He is an owner who gets a fluctuating dividend
   3. He can vote at general meetings
   4. He is repaid only on winding up
   Show answer

   Answer: A. He is a creditor who gets fixed interest and has no voting right
   A bond is a debt security, so the holder is a lender who receives fixed interest and has no vote.

5. Equity shareholders are called residual claimants because they

   1. Have first claim on income
   2. Never receive any income
   3. Are paid whatever is left after all other claims are met
   4. Are paid before preference shareholders
   Show answer

   Answer: C. Are paid whatever is left after all other claims are met
   They are paid last, but they receive the entire remaining income and assets.

All Class 12 Secretarial Practice chapters

• Chapter 1: Introduction to Corporate Finance
• Chapter 2: Sources of Corporate Finance
• Chapter 3: Issue of Shares
• Chapter 4: Issue of Debentures
• Chapter 5: Deposits
• Chapter 6: Correspondence with Members
• Chapter 7: Correspondence with Debentureholders
• Chapter 8: Correspondence with Depositors
• Chapter 9: Depository System
• Chapter 10: Dividend and Interest
• Chapter 11: Financial Market
• Chapter 12: Stock Exchange

Class 12 Secretarial Practice notes: all chapters