Business - WS5 Equity Finance (General Terms) Flashcards
What is capital?
- Funds available to run the business of a company.
- Share capital- money raised by issue of shares.
- Share capital is contributed by investors and represented by shares issued to such investors
Why does a company need funds?
What are the ways of raising funds?
*When a company is set up, funds are needed to get the business started, e.g., to buy stock and machinery.
*Funds are also needed to keep the business going, commonly known as ‘working capital’.
*Funds are also needed for expansion and growth, e.g., by taking on new premises or buying other businesses.
Ways of raising funds:
o Issuing shares (equity finance).
o Borrowing (debt finance).
o Retaining its profits for use in the business rather than paying dividends
What are shares?
Shares are a bundle of rights.
By investing in the share capital of any company, the investor becomes an owner (member) of the company will have voting rights in shareholder meetings.
Private companies - most investors make a long-term investment and will only get their investment back on a sale of the their share, a sale of the company itself, on a flotation or where the company is wound up (provided sufficient funds are avaialble)
The incentives for investing would be the receipt of income (by way of dividend) and a capital gain (by way of growth in the value of the company, and therefore the individual shares) although neither are guaranteed.
What is nominal par value?
Nominal par value:
o Any allotment of share without fixed nominal value is void.
o Minimum subscription price for that share.
o Represents unit of ownership rather than value of share-common nominal values are 1p, 5p or £1.
o Cannot be issued at a discount to nominal value.
What is a premium?
A share may be allotted / issued for more than its nominal value, and the excess over nominal value is known as the premium.
The market value will often be much higher than the nominal value of the share.
What does ‘issued shares’ mean?
The amount of shares in issue at any one time is known as the issued share capital (ISC)-this is the amount of share capital that will be shown in the company’s balance sheet in its accounts.
*A company’s ISC is made up of:
- Shares purchased by the first members of the company, known as the subscriber shares.
- Further shares issued after the company has been incorporated, to new or existing shareholders.
- New shares can be issued at any time provided the correct procedures are followed.
