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.

Hint:

Equity capital provides ownership and potential for higher returns but involves more risk, whereas debt capital offers fixed returns with lower risk but does not provide ownership in the company.

Answer 1

The types of capital advised by the manager are:

• 
  Equity Capital (40%): This is the capital invested by the owner or shareholders. It represents ownership in the company and can change its form as the business grows, often through the issue of more shares or changes in ownership structure.
• 
  Debt Capital (60%): This is the capital raised through loans, bonds, or other debt instruments. Debt capital does not change its form and must be repaid along with interest.

Two differences between equity capital and debt capital:

• 
  Ownership vs. Liability: Equity capital represents ownership in the company, while debt capital is a liability that the company must repay.
• 
  Dividend vs. Interest: Equity holders receive dividends based on the company’s profits, while debt holders receive fixed interest payments, regardless of the company’s performance.