Issues of shares

Question 1

A full listing requires _____ of shares to be in public hands, and a _______trading record is required.

Answer 1

A full listing requires 25% of shares to be in public hands, and a three-year trading record is required.

Question 2

Companies choose to incur the costs of obtaining and maintaining a quotation to

Answer 2

raise capital, make it easier to raise further capital in the future, give existing shareholders an exit route, and make the shares more marketable and easy to value.

Question 3

The possible disadvantages of obtaining a quotation are that it is

Answer 3

expensive and time-consuming, there may be additional disclosure requirements, regulation, and accounting standards to comply with, original owners have no control over the future owners of the company, and a takeover bid is possible.

Question 4

The main methods of obtaining a quotation are

Answer 4

offer for sale at a fixed price, offer for sale by tender, offer for sale by subscription, placing, and introduction.

Question 5

__________is the usual method for obtaining a stock exchange quotation while also raising new money.

Answer 5

Offer for sale

Question 6

We have just described various reasons why a company might obtain a quotation. List the
possible disadvantages of doing s

Answer 6

Solution
Possible disadvantages:
 Obtaining a quotation is expensive and time-consuming.
 There may be additional disclosure requirements, regulation and accounting standards to
comply with.
 Original owners have no control over the future owners of the company.
 A takeover bid is possible.

Question 7

In an offer for sale at a fixed price, a predetermined number of shares (or other securities) is offered to the general public at a

Answer 7

specified price via an issuing house

Question 8

Companies that are already quoted are almost exclusively used other than

Answer 8

offers for sale.

Question 9

An offer for sale by tender is similar to an offer

Answer 9

for sale at a fixed price.

Question 10

(offer for sale by tender) Instead of inviting applications at a specified price, members of the public are invited to

Answer 10

submit a tender stating the number of shares they want to buy and the price they are willing to pay.

Question 11

The prospectus gives a _______, but investors determine how much to _______.

Answer 11

The prospectus gives a minimum price, but investors determine how much to bid.

Question 12

The issuing house determines a single strike price,

Answer 12

which may be the highest price at which all the stock can be allocated.

Question 13

All successful applicants pay the___________, regardless of how much more they had bid

Answer 13

strike price

Question 14

The allocation process for an offer for sale by tender is more complex and can produce

Answer 14

a more concentrated ownership of the shares.

Question 15

All investors who bid below the strike price in the event of the offer being oversubscribed _______

Answer 15

receive no shares at all.

Question 16

Concessionary methods of obtaining a listing:

The Stock Exchange allows alternative new issue methods to be used in some circumstances.
Offer for subscription is similar

Answer 16

to offers for sale, but the whole issue is not underwritten.

Question 17

In an offer for subscription, the company sells shares

Answer 17

directly to the public, and the issuing company bears at least part of the risk of undersubscription.

Question 18

Sometimes offers for subscription are used for

Answer 18

unusual issues or launches of investment trusts.

Question 18

Sometimes offers for subscription are used for

Answer 18

unusual issues or launches of investment trusts.

Question 19

Placings are a simpler, cheaper method of making small issues, where the issuing house

Answer 19

buys the securities from the company and individually approaches institutional investors directly.

Question 20

Smaller investors dislike placings because

Answer 20

they are not able to buy the shares.

Question 21

Introductions can be used in several circumstances, such as

Answer 21

where an overseas company wants a UK Stock Exchange listing or where an already listed company wants to de-merge into two or more separate companies.

Question 22

Underwriting is always used for

Answer 22

an offer for sale.

Question 23

An underwriter agrees to take on the risk of any unsold shares, so the issuing company is

Answer 23

guaranteed to raise a certain amount of capital.

Question 24

The underwriter may form a syndicate of other underwriters

Answer 24

to spread the risk.

Question 25

The underwriter ________ for the underwriting service.

Answer 25

charges a fee

Question 26

Underwriting provides ____________for the issuer and the investors, but it can be expensive.

Answer 26

Underwriting provides certainty for the issuer and the investors, but it can be expensive.

Question 27

Question
List the main methods by which a company can obtain a listing on the Stock Exchange.

Answer 27

Solution
The main methods are:
1. offer for sale at a fixed price
2. offer for sale by tender
3. offer for subscription
4. placing
5. introduction.

Question 28

Question
In each of the following multiple-choice questions, either one or two of these options is correct:
I offer for sale
II offer for subscription
III introduction
In each case answer the question using the following code:
A if I and II only are correct
B if II and III only are correct
C if I only is correct
D if III only is correct
(i) Which may be at either a fixed price, or by tender?
(ii) Which raise new money?
(iii) Which involve the sale of shares to an issuing house?
(iv) Which does not involve the sale of shares?
(v) Which is cheapest for the company?
(vi) Which is most expensive for the company?

Answer 28

(i) A
(ii) A
(iii) C
(iv) D
(v) D
(vi) C

Question 29

If shareholders waive their pre-emptive rights, companies can

Answer 29

use a placing to raise additional capital.

Question 30

Companies can increase the number of shares without raising new money by issuing new shares to existing shareholders in proportion to their existing shareholdings, which is called a

Answer 30

scrip issue.

Question 31

Companies wanting to raise new loan or preference share capital can use

Answer 31

a placing, an offer for sale or for subscription.

Question 32

When an existing shareholder wants to sell a large block of shares, __________ is made instead of selling the shares on the market.

Answer 32

an offer for sale

Question 33

Rights Issues
Introduction

Companies must offer new shares to existing shareholders when they want to raise more)______

Answer 33

capital.

Question 34

A rights issue is where

Answer 34

a company offers further shares, at a given price, to existing shareholders in proportion to their existing holdings.

Question 35

The price is at a discount to the current share price to make it .

Answer 35

more attractive

Question 36

The main effects of a successful rights issue are

Answer 36

that new shares are created, new money is raised, the total value of the company should increase, and the price per share will fall.

Question 37

Companies have various reasons for needing more money, such as to reduce the ratio

Answer 37

of debt to equity capital, finance an expansionary investment program, or pay for the purchase of another company.

Question 38

The stock market’s reaction to individual rights issues will depend on the

Answer 38

reasons for the issue.

Question 39

Timetable for a Rights Issue

A few weeks before the rights issue, the company discusses the possibility

Answer 39

of an issue with its advisers.

Question 40

Companies often like to have a rights issue when the stock market is

Answer 40

high.

Question 41

The company will publish a rights offer document, explaining

Answer 41

why the rights issue is being made.

Question 42

Shareholders are sent provisional allotment letters, and the shares start to

Answer 42

trade ex-rights.

Question 43

Shareholders are given three or more weeks to

Answer 43

accept the offer or sell their nil-paid rights.

Question 44

Market capitalisation is

Answer 44

the total value of a company’s outstanding shares.

Question 45

The share price before a rights issue is given by

Answer 45

market capitalisation divided by the number of shares

Question 46

The price per share after a rights issue is the original market capitalisation plus

Answer 46

the extra value divided by the total new number of shares. CT2 P.152 FORMULAS
.

Question 47

The extra value component includes the

Answer 47

amount of new money raised by the rights issue, the expenses of the issue, and the change in value based on the market’s revised perception of the company and the use to which the money is being put

Question 48

Estimate the theoretical ex-rights share price in each of the following cases:
1. Current price: 250p
Offer price: 150p
Basis: 1-for-1
2. Current price: 250p
Offer price: 150p
Basis: 1-for-3
3. Current price: 250p
Offer price: 150p
Basis: 1-for-10

Answer 48

Solution
In each case, we equate what the investor starts out with (ie m shares worth 250p plus some
money) to what they end up with (ie m+n shares worth the new price).
Let the theoretical ex-rights share price be P.
1. 2P = 250 + 150
P = 200
2. 4P = 250  3 + 150
= 900
P = 225
3. 11P = 250  10 + 150
= 2650
P = 241

Question 49

Question
Describe the impact on the statement of financial position of the company making the first rights
issue in the previous question. Assume that the cash raised from the issue will be held in cash
(which appears in current assets in the statement of financial position). Before the rights issue, its
statement of financial position appeared as follows:
£m
Non-current assets 250
Current assets 100
350
Reserves 200
25p ordinary shares 150
350

Answer 49

Solution
Current number of 25p shares = 600m
Number of new shares issued = 600m
Nominal value of new shares = £150m
Cash raised = £900m
Expenses involved in rights issue unspecified.
Effect:
Current assets increase by £900m less expenses
Ordinary share capital increases by £150m
Reserves (ie share premium account) increases by £750m less expenses
If we ignore expenses, the new statement of financial position will look like this:
£m
Non-current assets 250
Current assets 1,000
1,250
Reserves 950
25p ordinary shares 300
1,250

Question 50

Shareholders who have cash and want to increase their exposure to the company can take up the rights by

Answer 50

spending the required amount to buy new shares at a discounted price.

Question 51

Shareholders who don’t want to spend cash or don’t want to increase their exposure to the company can

Answer 51

sell their nil-paid rights

Question 52

The theoretical market value of the nil-paid right is the difference between

Answer 52

the ex-rights share price and the rights issue price, which compensates the shareholder for the loss of value in the original holding.

Question 53

How can Shareholders who want to maintain the value of their holding ensures that the value of their holding remains the same, without any net expenditure.

Answer 53

can sell some of their nil-paid rights to buy new shares at the discounted price. This

Question 54

Shareholders who want to reduce their holding in the company can __________. This will result in a __________–

Answer 54

Shareholders who want to reduce their holding in the company can sell all their nil-paid rights to raise cash. This will result in a decrease in the market value of their holding by the amount raised through selling the rights.

Question 55

Rights issues are usually offered at____________ unless something goes wrong

Answer 55

a discount to the market price,

Question 56

If there is a collapse in the share price between the announcement date and the completion of the issue, the offer price

Answer 56

may no longer be at a discount to the market price. (formulas page. 165)

Question 57

Most rights issues are underwritten,

Answer 57

which means that various institutions agree to buy all the shares.

Question 58

Having an issue underwritten provides

Answer 58

assurance to shareholders that the issue will be completed even if not all shareholders take up their rights.

Question 59

Scrip issues are sometimes called capitalization or bonus issues. It refers to

Answer 59

the process of a company issuing free shares to all ordinary shareholders proportionate to their existing holdings without any payment from shareholders.

Question 60

A 1-for-2 scrip issue means that

Answer 60

for every two shares held, investors are given a free share.

Question 61

Scrip issues create new shares, but

Answer 61

no money is raised. The fundamental value of the company remains unchanged. The price per share should fall in proportion to the increase in the number of shares. The total value of each investor’s holding should be unchanged.

Question 62

why the name capitalization issue in scrip issues .

Answer 62

The reserves of shareholders are converted to share capital, hence the name capitalization issue.

Question 63

Scrip issues are a book-keeping exercise that helps improve

Answer 63

marketability by having more, lower-priced shares.

Question 64

Scrip issues don’t achieve much, and the arguments to support them are largely ___________

Answer 64

psychological.

Question 65

Shareholders like the idea of being given extra shares free of charge, hence the name ______

Answer 65

bonus issue.

Question 66

Scrip issues are associated with what companies

Answer 66

successful companies that have built up large reserves from retained profits.

Question 67

Scrip issues are taken to imply _____and provide a __________factor for shareholders.

Answer 67

Scrip issues are taken to imply success and provide a positive psychological factor for shareholders.

Question 68

The minimum price at which a rights issue can occur is the ______value of the shares, and rights issues must occur at a ________.

Answer 68

The minimum price at which a rights issue can occur is the par value of the shares, and rights issues must occur at a discount.

Question 69

Scrip issues reduce the price of a ,

Answer 69

share

Question 70

aving a scrip issue may reduce a company’s.

Answer 70

ability to have a future rights issue if its share price declined following the scrip issue.Hence, if the directors decide to have a scrip issue, they must be confident about the company’s prospects.

Question 71

Investors who read this contorted logic into a scrip issue may view a scrip issue as a

Answer 71

sign of good news.

Question 72

Some companies have a habit of having light scrip issues and subsequently

Answer 72

keeping the same dividend per share

Question 73

( Impact on share price )an n-for-m scrip issue should reduce the share price from P to:

Answer 73

P*m/(m+n)

Question 74

Calculate the theoretical share price after each of the following scrip issues:
1. Current price: 250p
Basis: 1-for-1
2. Current price: 250p
Basis: 1-for-3
3. Current price: 250p
Basis: 1-for-10

Answer 74

Solution
Again we equate what the investor starts out with (ie m shares worth 250p each) to what investors
end up with (ie m+n shares worth the new price).
Let the theoretical share price be P.
1. 2P = 250
P = 125
2. 4P = 250  3
P = 188
3. 11P = 250  10
P = 227

Question 75

Scrip dividends

Answer 75

A scrip dividend means that a company pays shareholders a dividend by giving them new shares
rather than cash.

Question 76

Scrip dividends can be an alternative to cash dividends when a company is facing

Answer 76

financial difficulties or wants to conserve cash

Question 77

two cases on scrip dividends

Answer 77

everyone has to accept the scrip dividend: This is just like a scrip issue (companies use
scrip dividends of this type when they can’t afford to pay a cash dividend). Shareholders
end up with more shares worth less each.
 there is a choice between a scrip dividend and a cash dividend: Unlike a scrip issue, the
scrip dividend option is worth as much as the cash dividend. Those investors that accept
the scrip dividend have more shares, but the market value of the shares will not have
been forced down. They have gained as much as if they had taken the cash. Really it is
like a normal dividend being paid followed by a rig

Question 78

Which of the following could NOT result in a company obtaining a stock exchange listing?
A an introduction
B a rights issue
C an offer for subscription
D a placing [2

Answer 78

Answer = B
Rights issues are used by companies that already listed in order to raise further capital. The other
three method are used for obtaining a listing.

Question 79

An arrangement whereby a company’s shares obtain a quotation on the London Stock Exchange,
and the shares that are made available are bought by a small number of institutional investors, is
known as:
A a placing.
B an offer for subscription.
C an introduction.
D an offer for sale. [2

Answer 79

Answer = A
All four are methods of obtaining a listing. A subscription and offer for sale are both offers made
to the public (directly by the company itself, or via an issuing house respectively). An introduction
does not make any shares available.

Question 80

The main significance of the par value of an ordinary share is that:
A it is the minimum price at which shares can be traded on the Stock Exchange.
B it is the minimum price at which shares can be issued by the company.
C it is the amount at which the shares will be redeemed.
D at prices above the par value a company must have a scrip issue. [2]
The next two questions relate to Company XYZ. The statement of financial position of XYZ prior to
a rights issue is given below (all figures in £000s):
Non-current assets 400 Share capital 120
Current assets 100 (Ordinary shares of £1)
Other reserves 50
Retained earnings 330
500 500
The market price of the company’s shares is currently £7 per share.

Answer 80

Answer = B
A is the market price. C is wrong because shares are usually irredeemable. D is false because
companies do not have to have scrip issues.

Question 81

If XYZ has a 1-for-3 rights issue at £5, the expected ex-rights price of the shares will be:
A £7.00
B £6.50
C £5.50
D £5.00 [2

Answer 81

Answer = B
The ex-rights price will be given by:
Price

=3 7+ 1 5/(3+1)
£6.50

Question 82

Following the rights issue, XYZ’s other reserves will be:
A £330,000
B £250,000
C £210,000
D £50,000 [2

Answer 82

Answer = C
XYZ will issue 40,000 new shares in a 1-for-3 rights issue (there are 120,000 shares to start with).
The amount that will be transferred to the other reserves will be:
(the number of shares issued)  (the amount above the par value)
= 40,000  £4 = £160,000
This will be added to the £50,000 that exists already in this account.

Question 83

Explain the role of the underwriters of a share issue. [5

Answer 83

Underwriting is a form of insurance against the risk of an unsuccessful issue. [1]
The company sells all the shares at an agreed price to the issuing house, which as lead
underwriter, agrees to take up any shares that are not subscribed for by the public. [1]
The issuing house will not usually want to retain the entire risk, therefore the lead underwriter
will often arrange for sub-underwriters (usually big financial institutions) to become involved. [1]
However, the lead underwriter is still responsible if a sub-underwriter defaults. [1]
In return for underwriting the share issue, the company will pay the issuing house a fee. In the
case of an offer for sale, the fee can be included in the difference between the price at which the
shares are sold to the issuing house and the price at which they are sold to the public. [1]Page 32 CB1-05: Issue of shares
© IFE: 2019 Examinations The Actuarial Education Company
If the share issue is fully subscribed, the underwriters make a profit equal to the fee less their
expenses. [1]
If the issue is undersubscribed, the underwriters are left with the surplus shares. They will sell
these in the market at a later date. [1]
[Maximum 5]

Question 84

Piron plc is a large manufacturing company that produces electronic products for the world
market and has branches in Europe and Asia. It is financed by a mixture of equity and debt
finance. The company now wishes to expand its range of products and needs further funds for
investment. The directors are considering the various financial options open to the company.
(i) One of the options being considered is a rights issue. Discuss the advantages and
disadvantages for Piron of undertaking a rights issue. [6]
(ii) The Finance Director has suggested that the company could issue Eurobonds. Discuss the
advantages and disadvantages of Eurobonds for Piron plc relative to other forms of
debt. [5]
(iii) List the other borrowing options available for Piron plc. [3]
(iv) Describe the factors the directors should consider when making their decision. [6]

Answer 84

(i) A rights issue
Advantages
 The company receives new equity capital to finance its expansion plans. [1]
 Equity finance is less risky for the company than debt finance as, unlike debt interest
payments, equity dividends are not a liability. [1]
 Dividends are paid at the discretion of the directors. There is greater opportunity to
plough back profits into the business. Debt interest must be paid every year. [1]
 The shares should be attractive to the shareholders since the business has good prospects
for the future. They should be able to be sold at only a slight discount to the current
share price. [1]
Disadvantages
 The company will have to check that the total share capital after its proposed new issue
does not exceed its authorised share capital. [1]
 The share price will fall. How far it falls depends on the extent of the discount, the
number of new shares issued, and the market view of the rights issue. [1]
 The company will have to consider the cost of undertaking a rights issue, including
underwriting costs (if they choose to have the issue underwritten). [1]
 Rights issues can take a long time to complete and require a lot of management time. [1]
 There may be adverse shareholder reaction to the issue. Some shareholders may not be
able to afford to buy new shares at the time of the issue and will be disappointed to see
their control of the company diluted. [1]
[Maximum 6]CB1-05: Issue of shares Page 33
The Actuarial Education Company © IFE: 2019 Examinations
(ii) Eurobonds
Advantages
 Eurobond issues attract investors from around the world. [1]
 Eurobond issues do not come under the tax or legal jurisdiction of any country. This lack
of regulation keeps the cost of borrowing down and it may be lower than borrowing in
the debt markets of any one country. [1]
 Eurobonds may be denominated in almost any currency. This would suit Piron plc, which
does business in Europe and Asia. [1]
 Eurobonds are a convenient way of borrowing foreign currency without entering overseas
financial markets. [1]
 There is no need to maintain a register of bond holders as Eurobonds are bearer. [1]
Disadvantages
 The minimum acceptable sum to be raised by Eurobonds is $75 million. Piron plc may not
want to raise as much as this. [1]
 Issues are arranged by a syndicate of investment banks. Piron plc will have to negotiate
the arrangements for the issue and the fee to be paid to the arranging banks. [1]
[Maximum 5]
(iii) Other options
The company could consider:
 debentures
 conventional unsecured loan stock
 preference shares
 convertible loan stock
 convertible preference shares.
[1 mark per bullet point, maximum 3]Page 34 CB1-05: Issue of shares
© IFE: 2019 Examinations The Actuarial Education Company
(iv) Factors to consider
Before making its decision, Piron plc should consider the following:
 the cost of raising the finance. The company should consider the initial issue cost, plus
the return that will have to be paid to the investors. [1]
 the tax position. Interest on debt finance is tax deductible, whereas dividend payments
are not. [1]
 the risk to the company. Interest on debt has to be paid, whereas dividends are paid at
the discretion of the directors. If Piron plc were to hit a bad patch, eg political unrest in a
country that it deals with, high interest payments could be very difficult to pay. [1]
 the effect on control. Debt holders have no vote, but shareholders do, although if Piron
plc has many small shareholders at present this may not be of great concern to them. [1]
 flexibility of finance. Share capital is usually irredeemable whereas debt is redeemable
and can be issued at various terms. [1]
 the volatility of the markets at the present time. It is easier to issue shares or bonds into a
stable or rising market. [1]
 the effect on the company’s statement of financial position. Too much debt can lead
shareholders to panic and sell the shares or debt covenants to be breached. [1]
 assets held. If the company has few tangible assets, it is difficult to raise debt finance.
This is not likely to be a problem for Piron plc since it is a manufacturing company with a
substantial and increasing amount of capital equipment. [1

Question 85

Underwriters are

Answer 85

investment banks or financial institutions that help companies go public by purchasing shares of the company at a discount and then reselling them to the public at a higher price.

Question 86

what role do Underwriters typically play

Answer 86

a key role in helping companies determine the optimal offering price, structuring the offering, and marketing the shares to potential investors.

Question 87

what role do Underwriters typically play

Answer 87

a key role in helping companies determine the optimal offering price, structuring the offering, and marketing the shares to potential investors.

Question 88

Underwriters also help to manage the risk associated with an IPO. If the shares do not sell at the expected price, the underwriter is

Answer 88

Underwriters also help to manage the risk associated with an IPO. If the shares do not sell at the expected price, the underwriter is responsible for buying the unsold shares, which can result in significant financial losses for the underwriter. As a result, underwriters typically perform extensive due diligence on the company going public to assess the risk associated with the IPO.

Question 89

Downside to underwriting

Answer 89

While it is possible to go public without underwriting services, the vast majority of companies choose to work with underwriters to help ensure a successful IPO. The underwriting process can be complex and time-consuming, but it can also provide companies with access to a broad range of investors and help to ensure a successful public offering.

Question 90

Downside to underwriting

Answer 90

While it is possible to go public without underwriting services, the vast majority of companies choose to work with underwriters to help ensure a successful IPO. The underwriting process can be complex and time-consuming, but it can also provide companies with access to a broad range of investors and help to ensure a successful public offering.

Question 91

whats a rights issue?

Answer 91

A rights issue is a type of corporate action in which a company offers existing shareholders the opportunity to purchase additional shares of the company’s stock at a discounted price.

Question 92

What’s the purpose of a rights issue

Answer 92

The purpose of a rights issue is typically to raise capital for the company. Shareholders are given the right to purchase new shares in proportion to their existing holdings, and this is usually done at a price lower than the current market price.

The new shares are typically issued to the shareholders on a pro-rata basis, meaning that each shareholder has the opportunity to purchase a number of new shares that is proportional to their current ownership in the company.

The shareholders can either exercise their rights and purchase the new shares, or they can choose to sell their rights to someone else.

Question 93

if I sell my rights as a shareholder how does the company benefit? does it mean the paid amount comes to me or goes to the company?

Answer 93

If you sell your rights as a shareholder, the company itself does not directly benefit. The money you receive from selling your rights goes to you, not the company.

However, by selling your rights, you are allowing someone else to purchase those rights and potentially increase their ownership stake in the company. This can provide additional capital to the company if the new shareholder decides to exercise their rights and purchase new shares.

Overall, selling your rights as a shareholder does not directly benefit the company, but it can indirectly benefit the company by potentially bringing in new investors and increasing the company’s capital.

Question 94

what happens when they choose to sell their rights to someone else.

Answer 94

When shareholders choose to sell their rights to someone else, they are essentially selling the opportunity to purchase new shares of the company at a discounted price to another investor. The investor who buys these rights from the original shareholder can then use them to buy new shares of the company at a discounted price, or they can choose to sell the rights to someone else.

The price at which the rights are sold is determined by market forces, and can fluctuate depending on a variety of factors such as the current market price of the company’s shares, the expiration date of the rights, and the demand for the rights.

It’s important to note that not all shareholders choose to sell their rights, and some may choose to exercise them and purchase new shares in the company. This can help the company raise additional capital and can also increase the shareholder’s ownership stake in the company.

Question 95

Equity finance is less risky for the company than debt finance explain

Answer 95

Equity financing is a way of raising capital by selling ownership shares in the company, such as common stock. Compared to debt financing, equity financing is generally considered less risky for a company due to the following reasons:
Advantages of Equity Financing:
* No fixed financial obligations: Equity financing does not create a fixed financial obligation that the company must repay within a specific timeframe.
* Flexibility in financial obligations: With equity financing, the company does not have a fixed repayment schedule or interest payments to make. This provides more flexibility in managing its financial obligations.
* Shared risk and losses: Equity investors bear the risk of the company’s performance. If the company incurs losses or faces financial difficulties, equity investors share in the impact.
* Potential for long-term growth: Equity financing allows the company to raise funds without incurring debt. This can provide a stable financial foundation for long-term growth and expansion.
* Improved creditworthiness: By relying more on equity financing, a company can strengthen its balance sheet and improve its creditworthiness.
However, it’s important to note that equity financing comes with its own considerations and potential drawbacks. Selling ownership shares in the company dilutes existing shareholders’ stakes, and equity investors may expect a share of future profits or involvement in decision-making. Furthermore, equity financing may not be suitable for all companies or industries, and the availability of equity investors may vary based on market conditions[1][2].

Question 96

break down the terms “company’s equity”

Answer 96

Company’s Equity:
Equity refers to the ownership interest in a company. It represents the residual interest in the company’s assets after deducting its liabilities. In other words, equity represents the portion of the company’s value that belongs to the owners or shareholders.
Equity can be calculated using the following formula:
Equity = Total Assets - Total Liabilities

It is important to note that equity represents the net worth of a company and is considered a key component of its financial structure. It can increase or decrease based on factors such as profitability, capital contributions, retained earnings, and changes in the value of assets and liabilities.

Question 97

break down the terms “share capital”

Answer 97

Share Capital:
Share capital, also known as equity capital or paid-in capital, specifically refers to the funds raised by a company through the issuance of shares or ownership stakes. When a company is established or seeks to raise additional capital, it may offer shares to investors in exchange for their investment.
Share capital is divided into shares, and each share represents a unit of ownership in the company. The shareholders who hold these shares are entitled to certain rights, such as voting rights in shareholder meetings and a share in the company’s profits (dividends) when distributed.

The amount of share capital is determined by the face value or nominal value assigned to each share. The face value multiplied by the number of shares issued represents the total share capital. For example, if a company issues 10,000 shares with a face value of $10 each, the share capital would be $100,000.

Share capital can be further classified into different types, such as:

Authorized Share Capital: The maximum amount of share capital that a company is legally authorized to issue.
Issued Share Capital: The portion of authorized share capital that has been actually issued and allotted to shareholders.
Subscribed Share Capital: The portion of issued share capital that shareholders have agreed to purchase.
Paid-up Share Capital: The amount of subscribed share capital that shareholders have paid for.
Overall, share capital represents the contributed funds from shareholders, which provides the initial capital base for the company and contributes to its equity.