Distribution of profits

Question 1

what is a dividend and what form can this take?

Answer 1

Dividend = payment from profits by the company to SHs

Usually cash or but can be transfer of non-cash asset.

Question 2

when can dividends be paid? What is the procedure under the MAs?

Answer 2

A company can only pay dividends if there are profits available for this purpose (i.e. distributable profits)

Under the MAs, Ds recommend the number of dividends to be paid and this is then declared by OR of the SHs

Question 3

what is the calculation for distributable profits?

Answer 3

Distributable profits = total accumulated realised profits - total accumulated realised losses

In other words inc. all profits + losses from revenue (i.e. sales) + capital (i.e. selling assets) since the company started (not just that financial year))

Question 4

what are the classes of share? How would you determine the rights the shares carry?

Answer 4

The AAs set out the rights attached to the shares. Main classes of share:
* Ordinary shares
* Preference shares

Question 5

what rights does an ordinary share typically carry?

Answer 5

voting rights and rights to dividends.

Question 6

explain preference shares inc. how the dividend they will receive is calculated + how often

Answer 6

preference shares rank ahead of other shares as to payment of dividends and capital but they carry limited voting rights.
o Typically fixed-income shares (i.e. the dividend is a % of each share they own. They will always receive the same amount, irrespective of the company’s success)
o Typically cumulative (i.e. if dividends cannot be paid in one year, they must be paid in the subsequent years before OS SHs) but can be non-cumulative

Question 7

what is a participating preference share?

Answer 7

SH is entitled to fixed dividend + additional profits once the OS SHs have been paid

Question 8

a company is issuing £40k dividends:
o 1000 PS - each entitled to 5% fixed dividend on their £100 par value.
o 4000 OS - entitled to remaining profits after PS paid

how many dividends are being paid to the PS and OS shareholders?

Answer 8

Each PS entitled to 5% of £100 = £5 per share
 £5 x 1000 = £5k  total PS dividends

£35k remaining profit / 4000 = £8.75 per OS