Capital Structure

Question 1

True or false

All companies have preference share capital but only a minority have ordinary share capital

Answer 1

False

*All companies have ordinary share capital but only a minority have preference share capital

Question 2

True or false

Ordinary shares represent the primary risk capital of a company

Answer 2

True

Question 3

An investor who buys …. shares acquire an element of ownership in the company. they are referred to as having an equity interest in the company

Answer 3

Ordinary

Question 4

Over the longer term, …. shareholders have historically been handsomely rewarded for assuming this equity risk. in the short term, however, they have generally experienced greater volatility in their returns

Answer 4

Ordinary

Question 5

Equity returns come from two main sources

Answer 5

Distribution: if the directors of the company consider it appropriate, they may declare a dividend to be paid to shareholders out of the distributable reserves of the company. Ordinary shareholders do not have a guaranteed right (statutory or contractual) entitlement to dividend; however, they have the right to approve or reject a final dividend by voting on the subject at the company’s AGM

Capital gains: shareholders usually have the right to sell their shares and may enjoy capital gains from appreciation in share price

Question 6

True or false

If the company is wound up there may be a surplus left after all creditors have been paid. this is paid to shareholders, who participate equally. this most frequently happen with investment trusts or other investment vehicles

Answer 6

True

Question 7

True or false

When a class of ordinary shares is first created, it is assigned a nominal value or par value. this may be any amount. the nominal value is fixed and bears no relationship to the market value of the shares, which may be very volatile. as the company grows and raises more equity capital, it may sell additional shares at a significant premium to the nominal value. however, all new issues of shares must be priced at or above the nominal value

Answer 7

True

*In certain Juri, such as Australia, HKSAR, Canada and many states of the US, shares can be issued with no par value

Question 8

True or false

Ordinary shares are redeemable as there is a specified provision for their repurchase by the company, therefore have a right to demand a repayment of their payment for their shares

Answer 8

False

*Ordinary shares are irredeemable as there is no specified provision for their repurchase by the company, therefore have no right to demand a repayment of their payment for their shares

Question 9

True or false

It is possible for a company, with shareholder approval, to buy its own ordinary shares in the market (known as a share buyback), and subsequently cancel them

Answer 9

True