Equity in limited companies

Question 1

What are the two forms of limited companies ?

Answer 1

public limited company (Plc)
private limited company (Ltd)

Question 2

What is the main difference between a Plc and a Ltd

Answer 2

private companies are prohibited from issuing shares. If any shares are proposed all shareholders must be consulted
public companies can issue shares on the stock market
Plcs need to submit accounts within 6 months of the years end, its 9 months for Ltds
Plcs need a minimum of £50,000 issued share capital
Plcs need a minimum of 2 directors

Question 3

Advantages of being a Plc

Answer 3

Easier access to capital
Able to assess worth of company easier
possibly give the company a more prestigious profile

Question 4

What is ordinary share capital ?

Answer 4

Capital invested into a company by its owners
Owning more shares gives you a larger control over the company

Question 5

What is share premium account ?

Answer 5

All ordinary shares have the same nominal value, determined by the company constitution e.g. £1, 50p, £2 etc.
But a company can sell issued shares for a higher price than the nominal value
Any amounts received in addition to the nominal value of the shares goes into the share premium account

Question 6

Company issues 1 million ordinary shares that have a
nominal value of 50p each. Public pays 85p for each share.
calculate how much cash would be raised

Answer 6

Ordinary share capital increases by 1,000,000 x 50p =
£500,000
This means public pays 35p premium per share
Share premium increases by 1,000,000 x 35p = £350,000
£850,000 added to Cash.

Question 7

What are retained earnings ?

Answer 7

The amount of a business’s net income that is kept within its accounts, rather than paid out to shareholders

Question 8

How do you calculate retained earnings ?

Answer 8

Balance at the beginning of the year.
Plus, profit of the year
Minus, dividend payment to shareholders

Question 9

What are general capital reserves ?

Answer 9

Firms can choose to move their retained earnings into general capital reserves
Capital reserves could be used for further investments, or to save as a ‘buffer-zone’ for future years

Question 10

What are the three sources of long term finance

Answer 10

share issued, retained earnings (equity)
long term borrowing (debt)