Lecture 5 - share capital, distributable profits and reorganisation

Question 1

What are the properties of ordinary shares?

Answer 1

• Risk
• residual profit

Question 2

What are the properties of preference shares?

Answer 2

• fixed rate dividend
• specific prior rights: (dividend, return on capital)

Question 3

Which shareholders are the last to receive benefits from the company?

Answer 3

Ordinary

Question 4

What are the 3 parts that make up total shareholders funds?

Answer 4

• Issued share capital
• non-distributable reserves
• distributable reserves

Question 5

What is issued share capital?

Answer 5

• what owners have put into the business
• Attract dividends
• Provide the owner of the shared one vote per share

Question 6

What are non-distributable reserves?

Answer 6

• cannot be distributed to shareholders unless business is liquidated
  eg share premium, revaluation reserve and capital redemption reserve

Question 7

Distributable reserve

Answer 7

• generally from profit related activities
• Accumulated through the businesses operations
• Used to pay dividend or to continue invest in the business

Question 8

What are the reasons for ordinary share issues?

Answer 8

• raising funds
• on acquisitions
• in lieu of dividends
• director/ employee share option schemes

Question 9

What are the methods of raising equity capital?

Answer 9

• an offer for subscription directly to the public
• a placing to financial institutes
• A rights issue to existing shareholders

Question 10

What are the 5 terms that can be used for preference shares?

Answer 10

1. cumulative
2. non - cumulative
3. Participating
4. redeemable
5. convertible

Question 11

What is a cumulative preference share?

Answer 11

dividends not paid in one year due to lack of profits, but are paid when profit becomes available

Question 12

What are non-cumulative preference shares?

Answer 12

dividends not paid in one year and are not accumulated

Question 13

What are participating preference shares?

Answer 13

Right to distribution of additional profits

Question 14

What are redeemable preference shares?

Answer 14

Can be redeemed by firm at a later date

Question 15

What are convertible preference shares?

Answer 15

Can be converted to ordinary shares at a later date, usually at preference holders discretion

Question 16

What is the difference in liabilities from creditors in an incorporated vs unincorporated firm?

Answer 16

unincorporated - liability unlimited
incorporated - resitricted rights against owners, creditors cannot seek compensation above agreed terms

Question 17

What are the rules to protect creditors?

Answer 17

• rules restricting reduction of capital
• rules requiring minimum share capital (PLC only)
• Rules for distributable profits
• Rules constrain directors’ dividend policy

Question 18

What is creditors risk?

Answer 18

The risk of not receiving repayment of amounts lent to a business are still associated with lending to a buisness

Question 19

What is business risk?

Answer 19

• protection against fraud
• no protection against normal commercial risk

Question 20

What are the risks that shareholders paid ahead of creditors?

Answer 20

• rules requiring minimum share capital
• Rules giving criteria for distributable profits

Question 21

What are non-distributable reserves for public companies?

Answer 21

• Share capital & share premium
• Capital redemption reserve
• Statutory non-distributable reserves
• Contractual non-distributable reserves
• Excess of accumulated unrealised profit over accumulated unrealised losses

Question 22

What are examples of distributable profits for private companies?

Answer 22

• 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)

Question 23

What are examples of non-distributable profits for private companies?

Answer 23

• Unrealized profits cannot be distributed.
• Realized revenue/capital profits regarded the same.
• Realized losses must be taken into account

Question 24

Any repaid permanent capital must be?

Answer 24

replenished by a transfer out of profits, or replaced by new capital

Question 25

What are the 3 ways a reduction in share capital can be undertaken?

Answer 25

1. Company’s share capital > fair value of its underlying assets
2. Company has liquid assets surplus to its needs, or
3. Company redeems its shares.