Question

On the basis of below given case study, answer the question.

The Directors of Shalini Ltd., which runs a famous fashion jewellery brand in India, have decided to expand their business activities globally especially targeting other Asian countries. Their Balance Sheet as at 31st March 2020 shows Equity Share Capital of ₹ 5 Crore, Preference Share Capital of ₹ 2 Crore and Borrowed Funds of ₹ 8 Crore. Their Balance Sheet is also reflecting Retained Earnings of ₹ 80 Lakh. The Directors are very much aware of the risks involved in International Business. Also, they are already under so much fixed obligation of payment of interest. But since they enjoy good reputation in the finance market hence various sources of finance are easily available to them. So, keeping all these factors in mind, they decided to increase their production for their international venture. For this, they need to increase the stock of raw material at an estimated cost of ₹ 1 crore.

Among the various heads which are reflected in the Balance Sheet of Shalini Ltd., which funds out of following put a lot of burden on the business as payment of interest is to be made, even when the earnings are low or when loss is incurred?

पर्याय

• Borrowed Funds

• Equity Shares

• Preference Shares

• Both Borrowed Funds and Equity Shares

Answer 1

Borrowed Funds

Explanation:

• Borrowed Funds (like loans, debentures) involve a fixed obligation of interest payment regardless of the company’s profits or losses. The company must pay interest even when the business is not earning well.
• Equity Shares and Preference Shares do not have such fixed interest obligations:
  • Equity shareholders get dividends only when profits are available.
  • Preference shareholders are entitled to a fixed dividend, but it is paid only if the company earns profits.