Theory question 102
Business FinanceDifferentiate between the following pairs of terms: (i) Interest and profit; (ii) Share and debenture; (iii) Ordinary share and preference share; (iv) Cumulative preference share and participating preference share; (v) Cum div and ex div.
Show the model answer
(i) Interest is the reward for capital (paid to lenders, fixed, whether or not there is profit); profit is the reward of the entrepreneur, what is left after all costs.
(ii) A share is part ownership of a company and earns a dividend that varies with profit; a debenture is a loan to the company that earns fixed interest and is repaid before shareholders on winding up.
(iii) Ordinary shareholders are paid last and their dividend varies, but they have voting rights; preference shareholders receive a fixed-rate dividend before ordinary shareholders and usually have no vote.
(iv) Cumulative preference: unpaid dividends of bad years are carried forward and paid later; participating preference: besides the fixed dividend, holders share in extra profit when profits exceed a set level.
(v) Cum div: share bought with the right to the dividend about to be paid; ex div: share bought without that dividend, which goes to the seller.
Give both terms in each pair a short definition so the difference is clear.