Allotment of shares & debt and equity - Finance)- FS Flashcards
(20 cards)
What are the two main methods a company can use to raise money?
A company can raise money through equity finance and debt finance, which are distinct methods of obtaining capital.
Why do companies need to raise finance during their lifecycle?
Companies need finance to start operations, cover ongoing expenses, purchase equipment and stock, and fund growth or expansion plans.
What is meant by the term “capital” in the context of company finance?
What is meant by the term “capital” in the context of company finance?
What is equity finance?
Equity finance is the process of raising money by issuing shares, where an individual invests in the company and becomes a shareholder in return.
How does equity finance affect company ownership?
Equity finance typically leads to an increase in the number of shareholders, as new shares are issued to individuals who invest money into the company.
Does equity finance increase or decrease the amount of money held by the company?
Equity finance is used to increase the amount of money held by the company.
What does a person receive in return for investing money in a company through equity finance?
The person receives shares in the company, thereby becoming a shareholder.
What is the usual relationship between investment and share issuance in equity finance?
Equity finance typically involves an individual investing capital into the company, and the company issuing shares to that individual in return.
How does equity finance differ from debt finance in principle?
Unlike debt finance, which involves borrowing money to be repaid, equity finance involves raising capital without a repayment obligation, by exchanging shares for investment.
In a private limited company, how is ownership typically structured among shareholders?
Ownership is based on the distribution of issued shares, with each shareholder owning a proportion of the company equal to their shareholding.
What is meant by the term “allotment of shares”?
Allotment of shares refers to the process by which a company issues new shares to an individual, resulting in that person becoming a shareholder of the company.
What is the immediate effect on the company’s share capital when new shares are allotted?
The total number of shares in the company increases, thereby expanding the company’s issued share capital.
How does the allotment of new shares affect existing shareholders?
Existing shareholders’ percentage of ownership decreases, as they continue to hold the same number of shares out of a larger total.
What happens to voting power when a company allots new shares?
Voting power is typically linked to shareholding; therefore, the voting power of existing shareholders is diluted when new shares are allotted.
Does allotment of shares require the company to take shares from existing shareholders?
No, allotment does not involve transferring existing shares. It involves creating new shares, which changes the overall share distribution.
What key legal consequence arises from increasing the total number of shares through allotment?
The proportional ownership of each existing shareholder is reduced unless they are also issued new shares in proportion.
Why might a company choose to allot new shares?
A company may allot shares to raise additional investment capital by bringing in new shareholders.
Is dilution of shareholding considered a legal or financial consequence of allotment?
It is primarily a financial and structural consequence, affecting ownership percentage and control within the company.
What remains unchanged for existing shareholders after a share allotment if they do not receive new shares?
What remains unchanged for existing shareholders after a share allotment if they do not receive new shares?
How should existing shareholders be advised about the potential impact of allotting new shares?
They should be informed that the allotment will increase the number of total shares, thereby decreasing their shareholding percentage and diluting their voting rights.
