Raising Equity Through Share Finance Essay - Free Essay Example

Sample details Pages: 12 Words: 3702 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? 4.1 Introduction: SHARES: Every share represents a small chance in the equity of a company. We can buy Huge or little lots to match the amount of money we want to spend. A Share price of a company can get higher or go down as a result of its own performance or Market circumstances. Don’t waste time! Our writers will create an original "Raising Equity Through Share Finance Essay" essay for you Create order One time the shares are brought and transferred to our name will be Came in the companys share register which will enable us to accept all The benefits of share ownership counting the rights to obtain dividends to Choose at the companys general meetings to collect the companys reports. If you make a decision to vend your shares you will have to send share certificates to The agent in time for the deal to be finished WHY COMPANIES SHARE ISSUE? The Companies issue shares to move up wealth from investors. This money is Use for the growth and development of business of companies. A Company can issue different kind of shares such as shares without voting rights preference shares, ordinary shares or any other Shares are acceptable below the law. These offer shareholders a Stake in the companys equity as well as a share in its returns, a voting right at general meetings of Shareholders, and in the form of dividends. Introduction: Ordinary shares are the basic building block of a companys share capital. They will carry votes (usually one each), have right to a dividend if the directos decide to pay one, and also be entitled to shares in any surplus on a winding up of a company. Other shares will take their rights, or lack of them, by reference to them to this base position. Non-voting shares are self explanatory (and a rarity these days, generally shunned by investing institutions but favoured by companies with a su bsintatial family shareholding for example, Daily Mail and General Trust). Preference shares may have a preferential right to a dividend ahead of the ordinary shares, or to a return of capital, or both. Deferred shares will rank behind the ordinaries (and tende to be used in capital reorganization where there is a need behind rthe ordinary shares virtually valueless). The directors handbook: your duties, responsibilities and liabilities: ÂÂ  By Martin Webster, Institute of Directors An equity interest in an entity can be said to represent a share of the entitys assets and a share of any profit earend on those assets after other claims have been met.the equity shareholders are the owners of the entity they purchase shares (commonly called ordinary-shares), the money in issued by the entity to buy the assets, the assets are used to earn profits, and the assets and the profits belong to the ordinary shareholders. Equity shares entail no agreement on the entitys part to return to the shareholders the amount of their investment. Ordinary shares are sometimes referred to as the risk capital of an entity; it is the ordinary shareholders who take most of the risk in business. If the entity were to fail altogether, the shares would be worthless, but the shareholder would normally be required to use his or her own money to pay off the entitys debts. Liability is said to be limited to to the original investment. Definition: Under IAS33 (part.5) An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments (i.e. ordinary shares participate in the net profit for the period only after preference dividends have been taken into account). A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. Principles of Generally Accepted Accounting Practice: Issues of ordinary shares: Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accurate . Ordinary shares issued in place of the interest or principal on other financial instruments are included from the date that interest ceases to accrue. Ordinary share issued in exchange for the settlement of a labiality of entity are included from the settlement date. Ordinary shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognised. Ordinary shares Issued for the rendering of services to the entity are included as the services are rendered. The timing of the inclusion of ordinary shares is determined by the terns and conditions attaching to their issue. Due consideration is given to substance of any contract associated with the issue. Ordinary shares issued as the part of the consideration transferred in a business combination are included in the weighted average number of shares from the acquisition date. this is because the acquirer incorporates into its statement of comprehensive income the acquiries profits and losses from the date. Contingently issuable shares are treated as outstanding and are included in the calculation of basic earnings per share only from the date when all necessary conditions are satisfied (the events has occurred ). Share that are issuable solely after the passage of time are not contingently issuable shares . Because the passage of time is certaininty. Outstanding ordinary shares that are contingently returnable (subject to recall) are not treated as outstanding are excluded from the calculation of basic earnings per share until the date the shares are not longer subject to recall. The weighted average number of shares outstanding during the period and for all period presented shall be adjusted for events other than the conversion of potential ordinary shares that have c hanged the number ordinary shares outstanding without a corresponding change in resources. Ordinary shares may be issued or the number of ordinary shares outstanding may be reduced. Without a corresponding change in resources. 1-a capitalization or bonus issue (some time refers to as stock dividend). 2-a bonus element in any other issue . for example a bonus element in a rights issue to existing share holder. International Financial Reporting Standards IFRS 2008: ÂÂ  By International Accounting Standards Board Nominal value: Ordinary shares may issued with a nominal value of, say, 10p each. These shares will continue to be referred to as 10p shares, even though the price at which they are bought and sold on the stock market may differ substantially from this. Dividends are usually paid in pence per share and are not based on nominal values, which is usually the case with fixed-interest securities. There is no express relationship between the nominal value and market value of a share. However, company law in the United Kingdom prevents shares from being issued below their nominal value. This means that an entity whose shares price has fallen below the nominal value would not be able to raise additional funds by way of share issue. Book value: Book values apply to both assets and liabilities. The book value of an asset is the net result of the accounting procedures and adjustments to which the balance has been subjected, for example depreciation charges. However it is not necessary any guide to the market, or realizable value of the asset. If financial strategy we are likely to be more concerned with the difference between book and market values of shareholders equity. The book value of equity is sum of the ordinary share capital shown in the balance sheet plus the value of shareholders reserves (share premium account, revaluation reserve, retained earnings, etc.). tthis value may be quite different from the markt value of equity . this is manily because the boo value: (a) Reflects accounting procedures and adjustments; and (b) Is a historical figure. Market value may reflect investors expectations about future earnings. Market value: This is the value of an asset based on the amount it is believed it would command if sold. Some assets such as shares, are traded regularly on an organized market and their value is relatively simple to establish. However, the market value of, for example specialized plant and machinery may be more difficult to establish. The market value of shares is simply the share price multiplied by the number of shares in issue. The share price reflects the investors expectation of future earnings; the book value reflects the accounting value of past earnings. An error sometimes made by students in calculating the market value of equity by correctly multiplying the shares price by the number shares in issue, then adding the accounting value of reserves. The market value of equity, the marklet capitalization, is calculated by multiplying the share price of an ordinary share by the number of shares in issue; the value of reserves is already in the market price of the shares and should not be double counted. 4.2 Ordinary shares: Ordinary share capital, as a long term source of finance. Represents ownership capital securities and its owners ordinary shareholders share the reward and risk associated with the ownership of corporate enterprise. it is also called ordinary share capital in contrast with preferences share capital which carries certain preference prior rights in regard to aincome and redemption. When a company is formed it issue equity shares to the promoters as the need for financing increase the company may issue ordinary shares to specific and small number privately to promoters relative friends corporations employees business associationfinantiol institutions mutual funds venture capital fund and so on. as the grows further it raises capital from the public the first issue of equity share to the public by an un listed company is called the initial public offering . Subsequent offers are called further issues offerings. This chapter discusses the ordinary equity shares as to raise the equity of any corporation or business. 4.2.1Ordinary shares also known as closely held stock: If the shares are owned by an individual or a small group who easily control the stockholders. There are different shareholders who have millions and thousands shares. So they are important for the company as they are large part of the company shares. This contrast of widely held shares. The shareholders that have small number of shares they sold their shares publically not traded in stock exchange. Closely held stock shares are sold personally by the shareholders. Closely held stocks are maintain at that time when new entrepreneurship is started. Then retain the ownership. 4.2.2 Common shareholders: Common shareholder is also share holder like other shareholder who is owner is owner of the company. This will give the right to the shareholder they can vote on the key issues like liquidation of the company , or any other major change board elections also take an active part when dividend are paid to the shareholders. There is some loss to the common share divide into categories as A and B class companys outstanding common shares stock.holders as when the company ay liquidates then the common shareholders receive at the end .debt holders receive firstly. Remaining is given to the preferred shareholders and the the common shareholders. The voting rights are 4.2.3 Common stock: Common stock represent as a security in the corporation. The common stockholder also has voting right. He can also elect as a board director and he can also vote at corporate policy. In the ownership structure the stockholders are at the bottom. When the liquidation is held he has right on the companys assets after preferred holders ore bondholders have paid fully. If the company is bankrupt first paid to the creditors then to the preferred shareholders receive their share in the assets. The debt or preferred shares are less riskier as compared to the common stockholders. The common stock holders are usually outperform than the bonds and the preferred share holders. 4.2.4 Marketable security: Any instrument that can easily converted into cash is called marketable security or easily exchange with any other stock. Short term commercial papers, bonds, stocks, these all are marketable security. These are demanded by the public and the public can easily convert it into cash. In private companies shares are more liquid and easily converted into currency with great ease.IBM shares and the bonds are the best examples of it. So finally this provide facility to the share holders they can easily change the securities into cash. 4.2.5 Trading of ordinary shares: The share holders can sell their shares to the general public or other parties who are interested for purchasing the shares. The stockholders want to trade their shares for the establishment of stock exchange. Where the stocks are traded that place is called the stock exchange the derivatives are also traded in the stock exchange. Stockbrokers are the agents who works for others. The brokers buy and sell at others behalf. A company can become listed company by fulfillment of required documents and cash consideration. Some stock exchange works through electric auctions. The companies who are failed to fulfill the requirements that are necessary for any company who wants to become the listed company. Buying: The stocks can buy from different methods. Usually the stocks are purchase from the brokers. Generally the brokers are used by the traders to buy the shares. There are different types of stock brokers from which the traders are choose according to their desire. There are discount brokers and full service brokers. The brokers who are charge more per trade the brokers also give advice to the investor thats good for the investor. Discount broker not gives advices and so for this they also charge less as compared to the full service brokers. Credit unions and banks are also works as broker. The investors can buy directly they do not take services of broker. Initial the shares are purchase from the brokers who works regularly for the company. There are two ways to buy stock one is against the money and other is on margin. Margin is the limit if the price is down from the margin the broker can buy the shares. The money which is borrowed is not free from the charge. The brokers usually ch arge 8% to10%. Selling: As usual every one want to earn profit he want to buy at low price and then after that want to sell at higher price. The fees of the brokerage depend on type of brokerage. When the transaction has settled then the seller has right to receive the money from the purchaser. The important thing of the selling to the purpose is earning. The fees are depending on the brokerage type then the fees is settled according to the type of brokerage. Taxes are received on the additional proceed by the tax authority. Stock price fluctuations: The stock price varies due to demand and supply factors. The stock price is also fluctuates according to the supply and demand changes. Demand and supply are also change due to other factors. The market conditions also effects the supply and demand theory. Some bodies have understood the conditions and that are good for the price determination of shares. The stock price fluctuation also depends on the customer behavior. It may be affected by the analyst decisions so that is much important for the company. Share price determination: The supply and demand are used to determine the price of the stock. Supply is that in which the shares are offered for sale. The number of shares which the investors want to purchase is called the demand. The equilibrium is used to maintain the price of the stock. There is no equilibrium if the supply is not equal to demand. When the supply increases the price also increase and when the demand increase the price also increase and so on price is directly proportionate to the supply and demand. When you want to check the equilibrium so then you can check it through the voting with money. If the investors invest more and more amount to purchase the shares the price of the stock will goes up. And as opposite if the more investors sell their shares then price will go down. Behavrioul finance is another form to determination of price. From this theory the people are mostly become irrational decisions. So at the end share price is determined by the supply and demand forces. greater fools theory is also used to determine the price of stock. capital stock or Share capital refer to the share of a companys equity that has been acquired by trading stock to a shareholder for an equivalent item of capital value 0r for cash. I.e. a company can set aside share capital to exchange for mainframe servers as an alternative of directly acquire the servers from on hand equity. Paid-up capital does not converse about the shares. Categories of Share Capital: Authorized Share Capital: This is the sum of the share capital. Which a limited company is permitted to issue to its shareholders. Authorized capital is also known as registered capital, at times capital. The portions of the authorized capital offered by the company to the investors the issued capital Issued Share Capital: Is the full amount of share capital issued to shareholders? Called up Share Capital: It is the amount which the shareholders are requisite to pay as the total sum of issued capital for. Paid up Share Capital: is the sum of share capital compensated by the shareholders. In finance and accounting, equity is the remaining claim or interest of the most junior class of investors in assets, after paid the all liabilities. If evaluation placed on assets does not go above liabilities harmful equity exists. In an accounting framework, Shareholders equity (or stockholders equity, shareholders finances, shareholders capital or similar terms) signify the remaining interest in assets of a company, spread among character shareholders of common or preferred stock. Cash refers to money in the substantial form of currency, such as banknotes and coins. 4.3 Preferred shares: Preferred stock is also known as preference shares or it is also simply known as preferred .that is significant equity security that has qualities of equity and a debt instrument. Such preferred stock is high in rank from common stock and low in rank from bonds. those stock holds that have preferred stock dont have any voting rights but they are given preference in paying the dividend and upon liquidation also .preferred stock may also be converted in common shares in future but that is entirely on the preferred stock holders will the rules and regulations of preferred stock are stated in a certificate that is known the certificate of designation.Same as bonds, stocks of preferred nature are rated by the major credit rating companies .the ranking of preferred stock is less since the dividend paid on preferred stock dont have compatible guarantees regarding the interest that is paid on bonds. Preferred stock junior in nature as compare to bands to all of the creditors. Functions of preferred shares: The qualities/features and functions that preferred stock have ,not processed by any ordinary shares .some of the functions of preferred stock are as follow Priority in paying dividends Priority in case of liquidation Conversion in common stock is possible Dont have any voting rights Normally, preferred shares are given priority in paying the dividend . but preference shares does not give assurance of the dividend but if they have decided to pay dividend to ordinary share holders than they have to make payment of dividend to preference share holders 1st than dividend can be paid to ordinary share holders . Preferred stock can be of two types: Cumulative preferred dividend Non_ cumulative preferred dividend 4.3.1 Types of preferences 4.3.2 Preference shares: Generally the preference shares means shares which fulfils the following conditions: 1. During the continuance of the company it must have assured preferential dividend. The Preferential dividend may consist of a specified amount payable to preference Shareholders before any thing is paid to ordinary shareholders or the amount payable as preferential dividend may be calculated at a fixed rate or percentage. 2. On the winding up of the company it usually carry a preferential right to be paid, that is, the amount paid up on preference shares must be paid back before any thing is paid to the ordinary shareholders. 3. Generally such shares do not carry voting rights. 4.3.3 Cumulative preference shares: If the Company is not able to pay preference dividend in one year, the arrears of dividend are to be carried forward and waged out of the profits of the consequent years, such preference shares are known as cumulative Preference shares. 4.3.4 Non cumulative preference shares: If unpaid dividend is not carried forward but lapses then such shares are known as noncumulative Preference shares. 4.3.5 Participatory preference shares: Preference shares which are entitled to participate in surplus profits, i.e. profit proposed to be distributed among the shareholders after dividend to preference and ordinary shareholders, are termed as participatory preference shares. Similarly in the winding up of a company, if, after paying back both the preference and ordinary shareholders, there is surplus, and the preference shareholders are entitled to share in the distribution of available surplus, then such preference shares are also known as participatory preference shares. 4.3.6 Convertible preference shares: Preference shares which are convertible into any other shares of the Company after a specified period of time or on occurrence of a defined event are termed as convertible preference shares. 4.3.7 Redeemable preference shares: Preference shares which are issued for a definite time period after the expiry of which the preference shares will be redeemed in cash are termed as redeemable preference shares. 4.3.8 Irredeemable preference shares: If preference shares are not redeemable / convertible after a specific period of time are called Irredeemable preference shares. 4.3.9 Stepped preference shares: Which increases annually by a specified amount and with a Preference shares with dividend? Predetermined capital return. 4.3.10 Zero dividend preference shares: Preference shares which receive no dividend through out their lives and instead a fixed known amount is paid at maturity. 4.4 Equity shares: According to Companies Act, 1956 and section 85 (2), , which is not preference shares Equity share can be describe as the share,. Any ways words equity shares are the shares, which do not have the following special rights: (1) At the time of winding up of the Company. Preference for refund of capital over others. (2) Preference of dividend over others . Sub-division of share capital: Sub division of capital may be divided into the following type these are as under.