Issue and Redemption of Shares and Debentures

Question 1

What is Share Capital?

Answer 1

Share capital refers to the portion of a company’s equity that has been obtained (or will
be obtained) by trading stock to a shareholder for cash or an equivalent item of capital
value.

Question 2

What are the two compositions of Share Capital?

Answer 2

• Ordinary Share Capital
  Ordinary shares are shares which are held by those considered as the owners of
  the business as such they rank last in dividend distribution and the sharing of
  liquidation proceeds.
• Preferred Share Capital
  Preference shares carry a predetermined dividend rate and rank ahead of ordinary
  shares in terms of dividend and liquidation distribution.

Question 3

What are some of the characteristics of Ordinary shares?

Answer 3

• Ownership and voting rights
  ordinary shareholders own part of the company and have voting rights on key issues such as electing board members.
• Dividends
  ordinary shareholders may receive dividends at the discretion of management.
• Residual claim on assets
  if a company is liquidated, ordinary shareholders are paid last, after creditors and holders of preferred shares.

Question 4

What are some of the characteristics of preferred shares?

Answer 4

• Priority for dividends
  ordinary shareholders get priority over ordinary shareolders when it comes to paying dividends
• Fixed dividend rate
• No or limited voting rights

Question 5

Preferred shares may be redeemable or irredeemable, what does this mean?

Answer 5

• Redeemable
  these are preferred shares that have a term limit, after which the holder will be paid off the value of the shares held and will no longer be a shareholder
• Irredeemable
  these are preferred shares with no term limit and are expected to be held until eternity.

Question 6

Shares may be cumulative or uncumulative, what does this mean?

Answer 6

• Cumulative shares
  these are shares that have the right to carry forward any unpaid divided for the year
• Uncumulative shares
  these shares do not have the right to carry forward any unpaid dividend.

Question 7

What is authorized share capital?

Answer 7

This is the total number of shares a company can issue as per its articles of association.

Question 8

What is Issued share capital?

Answer 8

This is the number of shares offered for sale.

Question 9

What is paid up share capital?

Answer 9

This is the number of shares that have been bought from the issued share capital.

Question 10

What is the difference between the redemption and the repurchase of shares?

Answer 10

• Redeemed Shares
  These are shares that were issued with the intention of a buyback
• Repurchased Shares
  These are shares that were issued with no intention of being bought back

The process of repurchasing is the same as that of
redemption. However, the two are not the same.

Question 11

What are the advantages of issuing shares through a stock exchange?

Answer 11

1. Gives the company a chance to raise more capital for the business.
2. Shares are easy to transfer between investors without affecting the operations of a business.🫴🏾
3. Shares traded on the stock exchange can easily be used as consideration in business take overs. 🫱🏾🫲🏾

Question 12

What are the disadavantages of issuing shares through a stock exchange?

Answer 12

1. Where more shares are floated there is a risk of business take over.
2. The stock market has rigorous financial reporting requirements.
3. Increased exposure of the business operations because financial statements are required to be made public.

Question 13

What is the nominal value of a share?

Answer 13

The nominal value also know as the par value or face value is the fixed value assigned to it when a company is formed. It represents the minimum price at which shares can be initially issued and is stated in the company’s legal documents (such as the memorandum of association).

The nominal value is fixed, while the market price fluctuates based on supply and demand.

Question 14

What are accounts are affected when shares are issued through installments?

Answer 14

1. Application account
2. Allotment account
3. Call account

Call account may be, the first call, second call and so forth as required by the company. Application and allotment accounts are usually combined for presentation purposes.

Question 15

Can shares be issued at a discount?

Answer 15

No, the company act prohibits it.

Question 16

Why would a company want to redeem its shares or debentures?

Answer 16

• The shares or debentures were issued as redeemable and the redemption time has come.
• The company would like to Improve it’s financial position.
• The company would like to buy out a dissident shareholder.
• The shares or debentures are being held by a deceased person and the beneficiaries have opted to cash out on the investment.

Question 17

What are the applicable rules when a company is redeeming or repurchasing shares?

Answer 17

• Shares must be fully paid up
• A company is not allowed to redeem all of its shares
• Shares can be redeemed if there is a new issue of another type of shares
• When a company redeems shares at a premium without having originally issued them at a premium, it must transfer funds from profit reserves to the share purchase or redemption account.
• If no new shares are issued or the proceeds from new shares are insufficient to cover the redemption, an adequate amount must be set aside in the capital redemption reserve, which is non-distributable.

Question 18

What is a public issue of shares

Answer 18

A public issue of shares refers to the process by which a company offers its shares to the general public for the first time or subsequently to raise capital.

This is typically done through the stock market, and it allows the company to raise funds from a large number of investors.