Lecture 5 - share capital, distributable profits and reorganisation Flashcards
What are the properties of ordinary shares?
- Risk
- residual profit
What are the properties of preference shares?
- fixed rate dividend
- specific prior rights: (dividend, return on capital)
Which shareholders are the last to receive benefits from the company?
Ordinary
What are the 3 parts that make up total shareholders funds?
- Issued share capital
- non-distributable reserves
- distributable reserves
What is issued share capital?
- what owners have put into the business
- Attract dividends
- Provide the owner of the shared one vote per share
What are non-distributable reserves?
- cannot be distributed to shareholders unless business is liquidated
eg share premium, revaluation reserve and capital redemption reserve
Distributable reserve
- generally from profit related activities
- Accumulated through the businesses operations
- Used to pay dividend or to continue invest in the business
What are the reasons for ordinary share issues?
- raising funds
- on acquisitions
- in lieu of dividends
- director/ employee share option schemes
What are the methods of raising equity capital?
- an offer for subscription directly to the public
- a placing to financial institutes
- A rights issue to existing shareholders
What are the 5 terms that can be used for preference shares?
- cumulative
- non - cumulative
- Participating
- redeemable
- convertible
What is a cumulative preference share?
dividends not paid in one year due to lack of profits, but are paid when profit becomes available
What are non-cumulative preference shares?
dividends not paid in one year and are not accumulated
What are participating preference shares?
Right to distribution of additional profits
What are redeemable preference shares?
Can be redeemed by firm at a later date
What are convertible preference shares?
Can be converted to ordinary shares at a later date, usually at preference holders discretion
What is the difference in liabilities from creditors in an incorporated vs unincorporated firm?
unincorporated - liability unlimited
incorporated - resitricted rights against owners, creditors cannot seek compensation above agreed terms
What are the rules to protect creditors?
- rules restricting reduction of capital
- rules requiring minimum share capital (PLC only)
- Rules for distributable profits
- Rules constrain directors’ dividend policy
What is creditors risk?
The risk of not receiving repayment of amounts lent to a business are still associated with lending to a buisness
What is business risk?
- protection against fraud
- no protection against normal commercial risk
What are the risks that shareholders paid ahead of creditors?
- rules requiring minimum share capital
- Rules giving criteria for distributable profits
What are non-distributable reserves for public companies?
- Share capital & share premium
- Capital redemption reserve
- Statutory non-distributable reserves
- Contractual non-distributable reserves
- Excess of accumulated unrealised profit over accumulated unrealised losses
What are examples of distributable profits for private companies?
- Retained realized profit brought forward
- Adjusted for net realized current year profit.
- a foreign currency gain on a monetary asset or liability
- a reversal of a loss previously regarded as realized (e.g. reversal of an impairment loss)
What are examples of non-distributable profits for private companies?
- Unrealized profits cannot be distributed.
- Realized revenue/capital profits regarded the same.
- Realized losses must be taken into account
Any repaid permanent capital must be?
replenished by a transfer out of profits, or replaced by new capital
What are the 3 ways a reduction in share capital can be undertaken?
- Company’s share capital > fair value of its underlying assets
- Company has liquid assets surplus to its needs, or
- Company redeems its shares.
