Shares and Debentures Flashcards
(43 cards)
What are shares?
A movable incorporeal asset that represents a unit into which the proprietary interest in a profit company is divided.
What is taken into consideration when determining the value of a share?
- Value of the company’s assets
- Goodwill
- Dividend yield
- Present and prospective profitability
- Possibility of capital appreciation
- Market value on stock exchange
What are the 3 sources from which a company is financed?
- Shareholders contribute capital
- Creditors lend money to company
- Company generates profits
What is share capital?
The total amount of money that a company raises by issuing shares to its shareholders. It represents the equity or ownership interest that shareholders have in the company.
What are the two forms of share capital?
- Authorised share capital
- Issued share capital
What is authorised share capital?
This is the maximum amount of capital that a company is allowed to raise through the issuance of shares, as specified in its MOI.
What is issued share capital?
This is the actual amount of capital raised by the company through the sale of shares to shareholders. Issued share capital can be less than or equal to the authorized share capital.
What is the share capital clause in the MOI?
A clause that sets out the authorised share capital and the types of shares into which the authorised share capital is divided.
Why is classification of shares important?
Type shares determines certain rights one holds in the company with regard to:
1. Voting rights
2. Right to information
3. Dividends and participation in distribution upon liquidation
What is the general rule regarding the division of shares into various classes?
Special, conditional or limited voting rights can be attached to any class of shares in the MOI, however at least 1 class of shares must have voting rights.
What are ordinary shares?
Ordinary shares represent equity ownership in a company and typically come with voting rights that allow shareholders to participate in major company decisions, such as electing directors or approving mergers. Ordinary shareholders are entitled to dividends, but the amount and timing are not guaranteed and depend on the company’s profits and board decisions.
What is the risk of being an ordinary shareholder?
Ordinary shareholders bear more risk in the event of liquidation, as they are last to be paid after creditors and preference shareholders
What are preference shares?
reference shares, or preferred shares, are a class of shares that provide shareholders with a fixed dividend, typically paid before any dividends are distributed to ordinary shareholders. Preference shareholders usually do not have voting rights in the company, but they have a higher claim on assets and earnings than ordinary shareholders, especially in the event of liquidation.
What is the reward for an ordinary shareholder?
They have the potential for higher returns if the company is successful because there is no fixed dividend.
What is the reward of being a preference shareholder?
- Preference shareholders receive a predetermined dividend, which is paid out before ordinary shareholders receive any dividends.
- In the event of the company being liquidated, preference shareholders are paid before ordinary shareholders but after creditors.
What is the risk of being a preference shareholder?
- Fixed dividend
- Typically no voting rights
What are the types of preference shares?
- Cumulative
- Participating
- Convertible
What are cumulative preference shares?
Cumulative preference shares are a type of preference share where the dividends accumulate if the company is unable to pay them in a given year. This means that if a company skips or defers paying dividends in a particular year due to insufficient profits, the unpaid dividends will “accumulate” and must be paid out to the cumulative preference shareholders before any dividends can be distributed to ordinary shareholders in future years.
What are participating preference shares?
Participating preference shares entitle shareholders to receive not only a fixed dividend but also an additional dividend if the company performs exceptionally well and exceeds a certain profit level. In addition to their fixed dividend, participating preference shareholders can participate in surplus profits (alongside ordinary shareholders) and may also have a claim on surplus assets in the event of liquidation.
What are convertible preference shares?
Convertible preference shares are preference shares that give the holder the option to convert them into a predetermined number of ordinary shares after a specified period or upon meeting certain conditions. The conversion can be beneficial to the shareholder if the ordinary shares’ market value has increased over time.
What are the voting rights in respect of preference shares?
MOI may provide that preference shareholders have no right to vote except in 2 circumstances:
1. When the preference dividend is in arrears
2. If a resolution is proposed which directly affects interests of these shareholders.
What are deferred shares?
Deferred shares are a type of share where the shareholder’s rights to dividends and repayment of capital are postponed until certain conditions are met, often after other classes of shareholders (such as ordinary or preference shareholders) have been paid.
What are redeemable shares?
Redeemable shares are shares that the issuing company has the right (or sometimes the obligation) to buy back (redeem) from shareholders after a certain period or under specified conditions.
What are deferred shares typically used for?
Deferred shares are sometimes issued to company founders or key employees to give them equity participation but delay their rights to profits until the company becomes more profitable.
