Question – 5

Direction (1-10): Read the passage carefully and answer the following questions.

Capital has been defined as that part of a person’s wealth, other than land, which yields an income or which aids in the production of further wealth.Capital serves as an instrument of production. Anything which is used in production is capital.In the ordinary language, capital is used in the sense of money. But when we talk of capital as a factor of production, it is quite wrong to confuse capital with money. There is no doubt that money is a form of wealth and it yields income, when it is lent out. But it cannot be called capital. Capital is a factor of production, but money as such does not serve as a factor of production. It is another thing that with money we can buy machinery and raw materials which then serve as factors of production.

Capital has been produced by man working with nature. Hence, capital may also be defined as man-made instrument of production. Capital, thus, consists of those goods which are produced for use in future production. Machines, tools and instruments, factories, canals, dams, transport equipment, stocks of raw materials, etc., are some of the examples of capital. All of them are produced by man to help in the production of further goods, services and wealth.

While money is used to purchase goods and services for consumption, capital is more durableand is used to generate wealth through investment. Examples of capital include automobiles, patents, software and brand names. All of these items are inputs that can be used to create wealth. Besides being used in production, capital can be rented out for a monthly or annual fee to create wealth.Capital has its own peculiarities and characteristics which distinguish it from other factors of production.Capital cannot produce without the help of the active services of labour. labour is an active, whereas capital is a passive factor of production. Capital on its own cannot produce anything until labour works on it.The composition or supply of capital is not automatic, but it is produced with the joint efforts of labour and land. Therefore, capital is a produced means of production.The total supply of land cannot be changed, whereas the supply of capital can be increased or decreased. If the residents of a country produce more or save more from their income, and these savings are invested in factories or capital goods, it increases the supply of capital.Of all the factors of production, capital is the most mobile. Land is perfectly immobile. Labour and entrepreneur also lack mobility. Capital can be easily transported from one place to another.

The term “capital” can refer to a number of different concepts in the business world. While most people think of financial capital, or the money a company uses to fund operations, human capital and social capital are both important contributors to a company’s overall financial health.The most common forms of financial capital are debt and equity.Equity capital is funds paid into a business by investors in exchange for common or preferred stock. This represents the core funding of a business, to which debt capital funding may be added. The equity shareholders are the owners of the company who have significant control over its management. They enjoy the rewards and bear the risk of ownership.In other words, it can be said that the equity capital refers to that portion of the organization’s capital, which is raised in exchange for the share of ownership in the company. These shares are called the equity shares.

There are various advantages of equity capital. Equity investors do not require a pledge of collateral. Existing business assets remain unencumbered and available to serve as security for loans.The firm has no obligation to redeem the equity shares since these have no maturity date. The equity capital acts as a cushion for the lenders, as with more and more equity base, the company can easily raise additional funds on favorable terms. Thus, it increases the creditworthiness of the company.Conducive feature of equity share capital is that the firm is not bound to pay dividends, in case there is a cash deficit. The firm can skip the equity dividends without any legal consequences.

There are some disadvantages also of raising the finances through the issue of equity shares. With the more issue of equity shares, the ownership gets diluted along with the control over the management of the company. The cost of equity capital is high since the equity shareholders expect a higher rate of return as compared to other investors.

Debt financing occurs when a firm sells fixed income products, such as bonds, bills, or notes, to investors to obtain the capital needed to grow and expand its operations. When a company issues a bond, the investors that purchase the bond are lenders who are either retail or institutional investors that provide the company with debt financing.Human capital is a much less intangible concept, but its contribution to a company’s success is no less important. Human capital refers to the skills and abilities a company’s employees bring to the operation.Social capital is an even more intangible asset, referring to the relationships people have to each other, and the desire they have to do things for and with others within their social networks.Working capital is a measure of both a company’s operational efficiency andits short-term financial health. Working capital can also be defined as the difference between a company’s current assets and current liabilities, working capital is a measure of a company’s short-term liquidity – more specifically, its ability to cover its debts, accounts payable and other obligations that are due within a year.If a company’s current assets do not exceed its current liabilities, then it may have trouble paying back creditors or go bankrupt. A declining working capital ratio is a red flag for the firm and financial analysts.

5. Which of the following statements is true in the context of the passage?

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