Week 4

Question 1

What is Share capital

Answer 1

For limited companies where shares are sold on the stock market, this is capital (called ‘equity’)
Shows how much the shareholders have invested in the firm

All shareholders receive dividends = a share of the firm’s profits

Question 2

What are Retained Profits

Answer 2

Retained profits at end of year=
retained profits brought forward plus this years retained profits

Retained profits are part of shareholders’ funds as they have not been paid out to shareholders

Retained profits form an important source of capital for the business and are a form of reinvestment

Question 3

What is Share Premium

Answer 3

Share premium is the excess of the issue price of shares over the nominal value

It is a capital reserve and thus cannot be distributed as a dividend

When a firm issues shares potential shareholders subscribe (i.e. pay) for them.

If a firm issues a share with a €1.00 nominal value at a price of €1.40 per share, €1.00 is added to the firm’s share capital while the €0.40 is added to share premium.

This occurs when a company issues shares above their Nominal (Face) Value

Example
Market Value $4.50
Issue Price $4.00
Nominal Value $1.00

Therefore Share Premium ($4 - $1) = $3.00
In the UK and other countries Share Premium is a ‘non-distributable’ or ‘capital’ reserve.
These type of reserves cannot be used to pay dividends