Q.4 (1) Distinguish between Owned Capital and Borrowed Capital.
Best answer
Answer: Distinction between Owned Capital and Borrowed Capital
| Point | Owned Capital | Borrowed Capital |
|---|---|---|
| Meaning | Capital contributed by the owners (shareholders) and profits retained in the business. | Capital raised by way of loans from outsiders. |
| Sources | Equity shares, preference shares and retained earnings. | Debentures, bonds, public deposits, loans from banks and financial institutions. |
| Status of providers | Providers are owners (members) of the company. | Providers are creditors of the company. |
| Return | Dividend, which depends on profit and is not compulsory. | Interest at a fixed rate, payable even if there is no profit. |
| Repayment | Permanent capital; not repaid during the life of the company (except preference shares/buy-back). | Temporary capital; repaid after a fixed period. |
| Voting rights and control | Equity shareholders have voting rights and control the company. | Lenders have no voting rights or control. |
| Security | No charge on assets is needed. | Usually secured by a charge on the assets of the company. |
| Risk | High risk to the investor; low financial risk to the company. | Low risk to the lender; fixed burden of interest on the company. |
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