Q.Distinguish between owned capital and borrowed capital.
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Start your 14-day free trial to unlock the full solution →Owned capital and borrowed capital are the two broad categories into which every source of corporate finance is grouped, and the differences between them run through almost every aspect of how a company is financed and controlled.
As to source, owned capital comes from the company's own shareholders — through equity or preference shares — or is generated internally by the company itself as retained earnings; borrowed capital comes from outside lenders, through debentures, bonds, public deposits, bank credit, or loans from financial institutions. As to permanence, owned capital is treated as permanent capital of the company, not repayable during its lifetime and returned, if at all, only on winding up; borrowed capital is temporary, always carrying a fixed date or event of repayment, however long its term might be. As to return, the providers of owned capital receive dividend, payable only out of profit actually earned and only if the company declares it; the providers of borrowed capital receive interest, a fixed contractual obligation the company must pay whether or not it has made any profit at all. As to control, providers of owned capital — principally equity shareholders — ordinarily carry voting rights and thereby exercise real control over the company's management; providers of borrowed capital have no voting rights and no say whatsoever in how the company is run, their relationship with the company being purely that of lender and borrower. As to security, owned capital is generally unsecured, with no charge created over the company's assets in favour of shareholders; borrowed capital, particularly debentures, is often secured by a charge over specific or general assets of the company. And as to priority on winding up, providers of o …
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