Lecture 6 - Company Finance Flashcards
In relation to company shares explain and distinguish between: Ordinary and Preference shares
Ordinary shareholders have an automatic right to have their capital repaid and to participate in the distribution of profit when the company is wound up provided the company has surplus assets once creditors have been satisfied. Dividends are payable to ordinary shareholders only according to declarations made by the directors and they are not cumulative.
A preference share usually carries a prior right to receive an annual dividend of a fixed amount. Preference dividends are usually cumulative. Unlike an ordinary share, a preference share does not usually carry a right to vote. Preference shares usually carry a priority right to return of capital.
What is a share
A share is a transferable form of personal property, carrying rights and obligations, by which the interest of a member of a company limited by share is measured. A member of a company who holds one or more shares is a shareholder.
In relation to company shares explain and distinguish between:
Rights issues and Bonus issues
Cash-strapped companies can turn to rights issues to raise money when they really need it. In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price. A rights issue is an allotment of additional shares made to existing members, usually pro rata to their existing holding in the company’s shares. These new shares are often available at a discount to the existing share price, to encourage investors to take part.
A one for 3 rights issue at £5 per share taken up by a shareholder who currently has 6,000 shares would mean that she could purchase an additional 2,000 shares at a cost of £10,000. In a public company If the members do not wish to subscribe for additional shares under a rights issue, they may be able to sell their rights and so obtain the value of the option.
A bonus issue is the capitalization of the reserves of the company by the issue of additional shares to existing shareholders in proportion to their shareholdings. Such shares are normally fully paid up with no cash called for from shareholders. A company allocates bonus issues according to each shareholder’s stake. Bonus shares do not dilute shareholders equity because they are issued in a constant ratio that keeps the relative equity of each shareholder the same as before the issue. For example, a three-for-one bonus issue entitles each shareholder three shares for every one that they hold before the issue. A shareholder with 1,000 shares receives 3,000 bonus shares (1,000 × 3 ÷ 1 = 3,000)
In relation to company shares explain and distinguish between:
Nominal and Market value of a share
The nominal value of a share is the fixed monetary amount specified in its constitution. The nominal value indicates how much the company raised when the shares were first issued and forms the company’s capital which is subsequently used for investment in the operation of the company. A company may issue 10,000 shares at a nominal value of £1.
The shareholders will pay £10,000 to the company. Shares of a public company may be traded. In trading these shares, the shareholders may agree a price for the shares that does not necessarily match the nominal value. This is known as the market value. If the company is performing well, and its prospects are good, the market value may be higher than the nominal value. Alternatively, the market value may fall below the nominal value.
In relation to company law explain the meaning of the following
Debentures
A debenture is the written acknowledgement of a debt by a company, which normally contains provisions as to repayment of capital and interest. A debenture holder owns transferable company securities which are usually long term investments in the company. From the investors’ standpoint, debenture stock is often preferable to preference shares since the former offers greater security and yields a fixed income. From the company’s standpoint raising capital by borrowing has obvious advantages but it has to bear in mind also the disadvantages such as the rate of interest payable and, in particular, the liability imposed by any charge which is created in order to rescue the loan. A debenture is usually a formal printed legal document. A single debenture is issued to a single lender, but debentures may be issued to a series of different lenders. Both corporations and governments frequently issue debentures to raise capital or funds. Some debentures can convert to equity shares while others cannot. Whatever the type of debenture, holders are creditors of the company. Unlike shareholders debenture holders are entitled to receive interest payments even if the company is not profitable.
In relation to company law explain the meaning of the following
Fixed charges
A fixed charge is a form of protection given to secured creditors relating to specific assets of a company. It attaches to the relevant asset as soon as the charge is created. By its nature a fixed charge is best suited to fixed assets such as land and buildings which the company is likely to retain for a long period. A company is not permitted to deal with or dispose of assets that are subject to a fixed charge without the consent of the charge holder. The charge grants the holder the right of enforcement against the identified asset in the event of default in repayment so that the creditor may realise the asset to meet the debt owed usually by appointing a receiver. Fixed charges rank first in priority in liquidation.
In relation to company law explain the meaning of the following
Floating charges
A floating charge permits a company to deal with the charged assets without the permission of the charge holder until such time as the charge crystallises thereby becoming a fixed charge. The nature of a floating charge is that it is a charge on a class of assets both present and future, which class is in the ordinary course of business changing from time to time and until the holders enforce the charge, the company may carry on business and deal with the assets charged. Floating charges are usually secured on assets such as inventory or trade receivables. Events causing crystallisation are liquidation of a company, cessation of a company’s business and active intervention by the chargee, generally by way of appointing a receiver. The main advantage enjoyed by a holder of a fixed charge as opposed to a floating charge is that a fixed charge creates immediate rights over identified assets. Even when a floating charge has crystallised the chargee may find himself subsequent to the claims of other creditors such as a judgement creditor or preferential creditor.
Explain Share capital
A limited company raises long term finance by issuing shares or debentures. All companies issue shares known as ordinary shares 1 Other varieties of shares may also be issued such as Preference shares 1
Unless otherwise indicated, all shares issued by a company are presumed to be ordinary shares 1 The implied rights of an ordinary shareholder by law are to be paid an unlimited non-cumulative dividend when the company makes a profit, and a dividend is declared 1 This payment is made after the payment of any preference dividends. Ordinary shareholders have a right to receive notice of and attend and vote at company general meetings 1 and a right to the return of capital, and share in any surplus capital on a winding up 1 In the event of a company going into liquidation the ordinary shareholders are only liable for the unpaid amount on their nominal share capital plus any premium 1 The defining characteristic of preference shares is that holders always have a priority right of payment of a dividend to the ordinary shareholders. Their dividend, unlike that of the ordinary shareholders, is usually at a fixed percentage of the nominal value of their share for example 8% preference shares of £1 each 1 Preference shareholders frequently have a right to prior repayment of capital on a winding up. They normally have no right to receive notice of company meetings and will have no right to vote
Explain Dividends on Ordinary Shares
A dividend is one type of distribution of a company’s assets to members of the company 1 The general rule is that is that any distribution can only be made from profits that are available for the purpose and not out of capital 1 A dividend is a debt only when it is declared and due for payment 1 Dividends can be final or interim 1 Only the directors can recommend to the members at a general meeting the amount of the dividend and payment dates. 1 Final dividends are then approved by the members who can vote to pay themselves that amount or less 1 Even if a company hasn’t made a profit in a current year, a dividend can still be paid if there are enough profits from previous years
Explain the main ways for a shareholder to exit from a company limited by shares and how those shares are likely to be valued
Shareholders can normally only exit from the company through selling their shares to a third party 1 In public limited companies this is carried out via a recognised stock exchange at the quoted market value 1 In private companies, shareholder agreements or the articles 1 may give shareholders a right to require other shareholders/directors to buy their shares in certain circumstances, or require them to transfer their shares if they leave their employment with the company 2 The articles or shareholders agreement may pre-determine the price of the shares 1 or provide that, if the parties cannot agree, the shares will be valued by an independent third-party valuer 1 In exceptional circumstances the courts may order the majority shareholders to purchase the shares of the minority
