sources of finance

Question 1

Equity:

Answer 1

Equity holder means shareholders or ultimate owner of company.
There are two types of shareholders:
1. Ordinary Shareholder
2. Preference Shareholders

Question 2

Ordinary Shareholder

Answer 2

Rate of Dividend
Variable

Payment of
Dividend
After payment to preference

Payment on
Liquidation
After payment to preference
shareholder

Voting Rights
Has voting rights.

Question 3

Preference Shareholder

Answer 3

Rate of Dividend
Fixed

Payment of
Dividend
Priority right of dividend

Payment on
Liquidation
Priority right of repayment

Voting Rights
No voting rights.

Question 4

Features of Shares:

Answer 4

1. Shareholders earn two types of returns i.e.
   o Dividend,
   o Change in share price (capital gain)
2. Cost of Equity is higher (as compared to debt), because:
   o Dividend is not deductible for tax purposes.
   o Risk is high in shares as compared to debt.
3. Shareholders have Pre-emptive right i.e. further shares are first offered to existing
   shareholders.
4. Issuance/Floatation cost of equity is high as compared to debt

Question 5

Initial Public Offering (IPO):

Answer 5

Public Offer means shares are offered to general public. Initial Public Offer means when a company
is first time offering its shares to general public.
In an IPO:
 Offer price is decided by company and broker.
 Normally, large amount of shares is acquired by Issuing house (i.e. an investment bank)
which then offers shares to general public.

Question 6

Private Placement:

Answer 6

Shares are not offered to general public, rather, they are offered to specific investors (usually
institutions) through brokers.
 It is a low cost method as there is no need of marketing, underwriting etc.
 It is suitable for small amount of financing.
 It is popular in Alternative Investment Market (AIM)
Advantages of Placing: (as compared to Introduction)
 Quicker
 Cheaper
 Less disclosure of information
Disadvantages of Placing: (as compared to Introduction)
 Shares are restricted to institutional investors who may get control of company

Question 7

Introduction

Answer 7

In introduction, no new shares are issued to general public. Rather, existing shares are registered
on stock exchange to increase their marketability and public trading so that company can have
better access to capital in future

Question 8

Right Issue

Answer 8

Right issue means issuing new shares to existing shareholders to raise finance. A right issue of “2
for 5” means each investor holding 5 shares will be eligible to buy 2 new shares.

Question 9

Bonus Issue

Answer 9

Bonus issue means issuing new shares to existing shareholders without raising any finance.
Company capitalizes its reserves to issue shares. It is normally done when company is not able to
pay cash dividend

Question 10

Difference between Right Issue and Bonus Issue:

Answer 10

 In right Issue, cash is received by company. Therefore, assets and liabilities both increase.
 In bonus issue, cash is not received by company. There, assets are not increased. Only
reserve is capitalized