Sources of finance for a joint stock company Flashcards
What are shares?
The capital of a company is divided into a number of equal parts known as shares.
What are equity shares?
Shares which carry no preference rights or priority in the payment of dividend and repayment of capital are called equity or ordinary shares.
Features of equity shares.
1) These are issued prior to preference shares and debentures.
2) E.S cap is repaid in the last in the event of of winding up the company.
3) Holders of e.s generally enjoy voting rights.
4) They are also entitled to the residual profits of the company.
Advantages of equity shares.
From company’s point of view.
- No burden on earnings
- Permanent capital
- no charge on assets
- Source of strength
- Small nominal value
- Unlimited source
Advantages of equity shares.
From investors’/ shareholders’ point of view
- Equity shareholders enjoy voting rights and controlling power over the company.
- **Equity shareholders have the pre- emptive right to subscribe to new shares issued by tne company. Such shares are called RIGHT SHARES.
- The liability of equity shareholders is limited to the f.v. of shares subscribed by them.
Disadvantages of equity shares
From company’s point of view
- Manipulation of control
- Danger of over- capitalization
- No trading on equity
- Costly
- Inflexible
Disadvantages of equity shares
From investors’/ shareholders’ point of view
- Perpetuation of control by a few
- High risk
- Unhealthy speculation
What are PREFERENCE SHARES?
Are the shares which carry certain privileges or preferential rights- both regarding the dividend and the return of capital.
Features of preference shares.
- Dividend at a fixed rate must be paid on p. shares before any dividend is paid on e. shares.
- In the event of winding up of the company, p. shareholders must be paid back their capital before e. shareholders.
Types of preference shares?
- Cumulative & non- cumulative
- Participating & non- participating
- Convertible & non- convertible
- Redeemable & irredeemable
Advantages of p. shares
From company’s point of view
- Appeal to cautious investors
- No burden on profits
- No interference in management
- No charge on assets
- Trading on equity
- Flexibility
Advantages of p. shares
From investors’/ shareholders’ point of view
- Investors get a more stable and regular dividend before payment of equity dividend. Rate of dividend of is fixed.
- Arrears of dividend accumulate and are payable in future, in case of cumulative preference shares.
- Risk involved is comparatively less because p. share cap is payable before e.s. capital on the winding up of the company.
Disadvantages of p. shares
From company’s point of view
- Costly source
- Legal formalities
- Low appeal
Disadvantages of p. shares
From shareholders’ point of view
- Lack of voting rights
- Fear of being shown the door
- No capital appreciation
- No guarantee of dividends
What are BONUS SHARES?
Bonus shares are the shares which the company issues to its existing shareholders free of charge i.e. as bonus.
What are RIGHT SHARES?
Equity shareholders have the pre- emptive right to subscribe to new shares issued by the company.
What are retained earnings?
R.E or Ploughing back of profits is the process of retaining a part of the net profit year after year and reinvesting the same in business.
What is retained earnings also known as?
‘Self financing’ - as it is an internal method of financing.
What are DEBENTURES?
Is a document or certificate* issued by a company as proof of the money lent to it by the holder.
It is an acknowledgement of debt* as well as an undertaking to repay the specified sum with interest* on or before the prescribed date.
Characteristics of debentures
- Represents borrowed funds
- interest on d. is paid at a fixed rate
- generally carry no voting rights
- involve a charge on the assets of the company
- interest payable every year irrespective of profits or not
Kinds of debentures
- Naked or mortgage
- Redeemable (callable) & irredeemable
(perpetual) - Bearer and registered
- Convertible & non- convertible
Advantages of debentures
From debentureholders’ view
- Appeal to cautious investors
- Regular return
- Safety of investment
Advantages of debentures
From company’s view
- Economic source
- Freedom of management
- Trading on equity
Disadvantages of debentures
From company’s view
- Permanent burden of interest
- Reduction in credit standing
- Charge on assets
- Reduction in dividend
Disadvantages of debentures
From debentureholders’ view
- No voting rights
- High unit price
- Unattractive
