Chapter 4

Question 1

Debt is money or assets obtained by the company when it does the following

Answer 1

1- Issues debt instruments such as debentures.
2- Obtains long term or short term loans.
3- Enters into lease agreements.
4- Obtains overdraft facilities from banks.

Question 2

There are two important developments with regards to the approach of the regulation of capital of a company

Answer 2

1- Virtual abolition of the capital maintenance concept.

2- The extensive default powers given to directors.

Question 3

Name the different corporate finance decisions

Answer 3

1- What assets are to be acquired and what assets are to be retained.
2- How assets under the control of the directors are to be financed.
3- How assets under the control of the directors are to be invested.

Question 4

The solvency and liquidity test must be applied in each of the following cases

Answer 4

1- When a company wishes to provide financial assistance for subscription of its security.
2- If a company grants a loan to a director.
3- If a company wishes to pay cash in lieu of issuing capitalization shares.
4- If a company wishes to acquire its own shares.

Question 5

What is the difference between issued and unissued shares

Answer 5

Issued shares are the shares which have been made available for purchase or allocated to particular shareholders.
Unissued shares are those which have been authorized but not yet issued.

The companies MOI sets out the different categories of shares but does not set out the amount(value).

Question 6

Name the different classes of authorized shares

Answer 6

1- Ordinary shares
2- Preference shares
3- Unclassified shares
4- Blank shares

Question 7

Explain the right to Pre-emption

Answer 7

As a general rule, shareholders in a company have the right of pre-emption to new shares issued by the company. This means that when the company issues new shares, they must be offered to the existing shareholders first, pro rata to their current shares.

Question 8

What are the requirements according to section 46 of the companies act before dividends can be paid out

Answer 8

1- The board of directors must authorize the distribution.

2- The company must be able to satisfy the solvency and liquidity test.