Owner's Funds-Part 2

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  • Q1

    Discuss any 3 types of Preference Shares.

    Marks:3
    Answer:

    Types of Preference shares:
    i. Cumulative Shares: Shares where unpaid dividends are accumulated and carried forward to be paid in year of sufficient profits. Arrears of dividend paid before dividend paid on any other shares. Unless stated otherwise, preference shares are cumulative.
    Non- Cumulative Shares
    Shares where dividends do not accumulate. If profits are not sufficient, claim to dividend cannot be carried to subsequent years.

    ii.
    Participating Shares
    Shares which give a right to holder to share the profits left after payment of dividend to Equity shareholders. Holders participate in surplus profits in addition to normal dividend.
    Non- Participating Shares
    Shares which do not give a right to share in the surplus profits of a company. They only get a fixed dividend.

    iii.
    Redeemable Shares
    Shares where holders can be refunded their capital after expiry of a specified period or at the discretion of the company as stated in the Articles of Association. These can only be issued by company limited by shares. Several conditions laid down by Companies Act for redemption.
    Non- Redeemable Shares
    Shares which cannot be redeemed before winding up of a company.

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  • Q2

    Describe ‘Ploughing back of Profits’.

    Marks:2
    Answer:

    'Ploughing back of profits' refers to the portion of the net earnings which may be retained in the business for use in the future. It is also called Retained Earnings.

    Availability of Profit for ploughing back depends on factors:
    i. Net profits
    ii. Dividend Policy
    iii. Future plans regarding modernization or expansion
    It is advantageous to companies, since it doesn’t carry a charge on the company’s assets. Also, it is convenient & economical, with no legal formalities.

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  • Q3

    What is a Participating Preference Share?

    Marks:1
    Answer:

    Participating Preference Shares are shares which give a right to holder to share the profits left, after payment of dividend to Equity shareholders. Holders participate in surplus profits in addition to normal dividend.

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  • Q4

    Explain deferred shares.

    Marks:3
    Answer:

    Deferred shares were issued earlier to promoters or founders for services rendered by them. As per Companies Act, no public limited company or its subsidiary can issue deferred shares.

    • Shares were of small denomination
    • Carried voting rights
    • Remained permanently invested
    • Rank later than preference and equity shares over payment of dividend and repayment of capital

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  • Q5

    Write a note on IDRs.

    Marks:3
    Answer:

    IDR is an instrument denominated in Indian Rupees created by an Indian Depository against the underlying equity shares of the issuing company.

    It enables ‘foreign companies’ to raise funds from the Indian financial market.

    For issuing IDRs the foreign company deposits its shares with an Indian Depository. The Depository issues ‘receipts’ to Indian investors against the shares held by them in the foreign company. The Indian investors get the benefit of bonus, dividends against these shares.

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