Question

Mr. Yang wants to invest 30 lakhs in his company. His manager advises him to invest 40% in capital that changes its form and the remaining 60% in capital that does not change its form. Identify the types of capital advised by the manager. State any two differences between these types of capital.

Answer 1

The types of capital advised by the manager are:

1. Equity Capital (40%): This represents the money that the owner or shareholders have invested. It symbolises ownership in the firm and can evolve as it expands, frequently by issuing additional shares or altering the ownership structure.
2. Debt Capital (60%): This represents the money that the owner or shareholders have invested. It symbolises ownership in the firm and can evolve as it expands, frequently by issuing additional shares or altering the ownership structure.

Two differences between equity capital and debt capital:

1. Ownership vs. Liability: Debt capital is a liability that the business must pay back, whereas equity capital reflects ownership in the business.
2. Dividend vs. Interest: While debt investors receive fixed interest payments regardless of the company’s performance, equity holders receive dividends based on the company’s profits.