10 Equity Financing

Question 1

Classes of shares
- Ordinary shares (focus) & preference shares
- With or without (focus) par value

Answer 1

Ordinary shares:
- Owners, right to vote, right to dividends, on liquidation right to receive proportionate share of net assets remaining

Preference shares:
- Have certain advantages like receiving dividends first

Question 2

Issue of shares to raise capital - Initial Public Offering (IPO). What is IPO and journal entry?

Answer 2

Shares can be issued for cash or another asset/service received

IPO is the first issue of shares to general public

Dr Cash
Cr Share capital

Question 3

Issue of shares - Rights issue

Answer 3

Issuing rights to company’s existing shareholders to buy a proportional no. of additional shares at a given price within a fixed period

Eg $50 per share FOR EVERY 2 SHARES held
- when calculating - (shares/2) x $

Question 4

Share split

Answer 4

Splits shares by increasing ord shares when market price is too ex

Does not change any account in B/S

Eg 2-for-1 share split

Question 5

Share buyback
- reduces outstanding shares
- reduces equity

Answer 5

Can be cancelled immediately
Dr Share Capital
Cr Cash

Usually held as treasury share (contra-equity)
Dr Treasury shares
Cr Cash

Question 6

Earnings per share (EPS) formula

Answer 6

EPS = Net Income / Weighted avg ordinary shares outstanding

*Rmb not in formula sheet

Indicates profitability per share

Question 7

Dividends journal entry on:
Dividend declared date
Dividend payment date
Dividend approval date

Answer 7

Dividend declared date:
Dr Dividend
Cr Dividend payable

Dividend payment date:
Dr Dividend payable
Cr Cash

Dividend approval date:
Dr Final Dividend
Cr Dividend Payable

Question 8

Dividend yield ratio formula

Answer 8

Dividends per share / market price per share

Measures return investor could receive on company’s share at current market price

Low - growth oriented company

Question 9

Dividend payout ratio formula

Answer 9

Dividends (annual) / Net income

Portion of current earnings paid to owners in form of dividend

Question 10

Book value formula

*Rmb, not in formula sheet

Answer 10

Book value = Total shareholder’s equity / no. of ordinary shares outstanding

Question 11

Market value is NOT = Book value. What causes this diff?

Answer 11

1. Acc rules - non-recognition of intangible assets
2. PPE measured: historical cost
   Inventory measured: lower of cost/NRV
3. Unit of measure: nominal dollars (ignore inflation)