Differentiate between the following pairs of terms: (i) Interest and profit: (ii) Share and denture (iii) Ordinary share and preference share (iv)Cumulative...

Answer Details

Differences between the pairs of terms

(i) Interest and Profit

Interest is the reward or price paid for the use of borrowed capital (loan capital), usually at a fixed rate. Profit is the reward earned by the entrepreneur for bearing risk and organising the other factors of production; it is the surplus of revenue over total cost and is not fixed.

(ii) Share and Debenture

A share is a unit of the ownership capital of a company; a shareholder is a part-owner and receives a variable dividend out of profit. A debenture is a loan to the company; a debenture holder is a creditor, not an owner, and receives a fixed rate of interest whether or not profit is made.

(iii) Ordinary share and Preference share

An ordinary share earns a variable dividend paid only after preference shareholders, carries voting rights and bears the greatest risk. A preference share earns a fixed rate of dividend paid before ordinary shares, usually carries no voting rights and ranks ahead of ordinary shares on repayment.

(iv) Cumulative preference share and Participating preference share

A cumulative preference share is one on which any dividend not paid in a lean year is carried forward and made up in later profitable years. A participating preference share is one that, besides its fixed dividend, is entitled to share in any surplus profit remaining after ordinary shareholders have received a stated dividend.

(v) Cum div and Ex div

Cum div (cum dividend) means the shares are sold together with the right to the dividend already declared, so the buyer receives the coming dividend. Ex div (ex dividend) means the shares are sold without the right to the declared dividend, so the seller keeps that dividend.