Corporate Finance: Equity vs. Debt Financing
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Questions and Answers

What does the nominal value of shares represent in a limited company?

  • An imaginary value that reflects shareholder ownership (correct)
  • The actual market value of the company
  • The dividend payout per share
  • The total amount invested by all shareholders

Under what circumstances can rights attached to a class of shares be varied?

  • When a majority of board members agree
  • According to provisions in the company’s articles or with class shareholder consent (correct)
  • With the approval of all company shareholders
  • Only if the company's profits increase significantly

Which statement about the director's duty regarding issuing new shares at nominal value is correct?

  • Nominal value can be used to issue shares only in the initial phase of the company's operation.
  • Directors must consult all shareholders before issuing any new shares.
  • Issuing new shares at nominal value can breach the director's duty of care if market values have increased. (correct)
  • Directors can always issue new shares at nominal value regardless of market value.

What is the distinction between allotment and issue of shares?

<p>Allotment grants the right to be listed in the register, while issue signifies the actual registration. (D)</p> Signup and view all the answers

Which of the following classes of shares does NOT typically carry voting rights?

<p>Preference A shares (C)</p> Signup and view all the answers

In the example provided, what is the maximum proportion of new shares that the first shareholder can acquire if the company issues 10 new shares?

<p>3 new shares (A)</p> Signup and view all the answers

Which of the following conditions would NOT typically allow a shareholder to have pre-emption rights?

<p>Issuing new shares on market rate (C)</p> Signup and view all the answers

What is a disadvantage of equity financing for existing owners?

<p>Dilution of ownership (B)</p> Signup and view all the answers

Which class of shares is characterized by the right to convert to other shares or debentures?

<p>Convertible shares (B)</p> Signup and view all the answers

In what situation are deferred shares beneficial to shareholders?

<p>During company liquidation (D)</p> Signup and view all the answers

What is a characteristic feature of redeemable shares?

<p>The company can buy them back at a later stage (B)</p> Signup and view all the answers

Which of the following types of shares does NOT carry voting rights?

<p>Preference shares (B)</p> Signup and view all the answers

How do cumulative shares impact dividends if they are not paid in previous years?

<p>They become a debt in subsequent years (D)</p> Signup and view all the answers

What is a significant feature of treasury shares when a company buys back shares?

<p>They remain registered under the company's name (C)</p> Signup and view all the answers

Which type of shares provides additional voting rights, such as multiple votes for one share?

<p>Weight voting shares (B)</p> Signup and view all the answers

Equity financing means obtaining funds through borrowing from lenders.

<p>False (B)</p> Signup and view all the answers

Preference shares carry voting rights equivalent to ordinary shares.

<p>False (B)</p> Signup and view all the answers

Cumulative shares ensure unpaid dividends become a liability in subsequent years.

<p>True (A)</p> Signup and view all the answers

If a company issues preference shares, shareholders are guaranteed dividends regardless of the company's profit status.

<p>False (B)</p> Signup and view all the answers

Ordinary shares allow shareholders to vote on company matters and receive dividends.

<p>True (A)</p> Signup and view all the answers

Bearer shares do not require the owner's name to be registered in the company records.

<p>True (A)</p> Signup and view all the answers

Deadlock shares are specifically designed to give shareholders the right to convert to other classes of shares.

<p>False (B)</p> Signup and view all the answers

Treasury shares are shares that are bought back by the company and are held for potential future issuance.

<p>True (A)</p> Signup and view all the answers

Nominal value of shares must always be set at 1 penny in a limited company.

<p>False (B)</p> Signup and view all the answers

If one shareholder holds 30% of the shares, they can acquire 4 new shares when 10 new shares are issued.

<p>False (B)</p> Signup and view all the answers

Class shares in a company are groups of shares that must share identical rights and characteristics.

<p>False (B)</p> Signup and view all the answers

Directors can issue new shares at nominal value even if this may breach their duty of care to the company.

<p>False (B)</p> Signup and view all the answers

Pre-emption rights do not apply to preference shares in a company.

<p>True (A)</p> Signup and view all the answers

A variation of rights attached to Class A shares can be made by a simple majority of Class A shareholders.

<p>False (B)</p> Signup and view all the answers

A company can create any class of shares as long as it is documented in the articles of association.

<p>True (A)</p> Signup and view all the answers

Flashcards

Equity Financing

Raising capital by issuing shares to investors.

Debt Financing

Raising capital by borrowing money from lenders.

Ordinary Shares

Common shares with full voting rights; receive dividends only if declared by the board.

Preference Shares

Shares that have a fixed dividend payment but do not have voting rights.

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Redeemable Shares

Shares that the company can buy back from shareholders.

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Convertible Shares

Shares that can be exchanged for other types of shares or debt.

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Class of Shares

Different categories of shares with varying rights and privileges.

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Shareholder Rights

Rights granted to a company's owners, including dividend payments, voting in meetings, and return of capital.

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Nominal Value

An imaginary value assigned to each share, representing its initial worth and used to measure shareholder ownership. It's typically a small fixed amount like 1p but can be any currency or multiple currencies.

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Market Value

The actual value of a company's share in the market, reflecting its current worth based on supply and demand.

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Pre-emption Rights

The right of existing shareholders to buy new shares in a company before they're offered to the public.

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Allotment vs Issue

Allotment is the unconditional right to have your name added to the shareholder register, while Issue is the actual moment your name is added.

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Variation of Class Rights

Changing the rights attached to a class of shares, requiring the consent of a specific percentage of shareholders within that class.

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Share Ownership

Shares represent ownership in a company, providing shareholders with the right to participate in its profits and control.

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Dividend Rights

Shareholders have the right to receive dividends (a share of the company's profits) if declared by the board of directors.

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Voting Rights

Ordinary shares grant voting rights to shareholders, allowing them to participate in decisions about the company's management and direction.

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Articles of Association

A company's rulebook governing its internal affairs. They define the rights and obligations of the company and its shareholders.

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What is Nominal Value?

The 'face value' of a share, a fixed amount assigned to each share, used to measure shareholder ownership. This value is not the actual worth of the share, just a way to track ownership.

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What is Market Value?

The actual price a share is trading for in the market. Reflects the current worth based on supply and demand.

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Why are there Different Share Classes?

Different categories of shares with varying rights and privileges, controlled by the company's articles of association. Some may have full voting rights, others may have preference in dividends, and some might be convertible.

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What is Allotment?

The unconditional right granted to someone to have their name added to the shareholder register. They don't have to actually become a shareholder yet.

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What is Issue?

The moment a shareholder's name is officially entered into the register of members. They're now officially a shareholder of the company.

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What are Pre-emption Rights?

Existing shareholders get the first refusal to buy new shares before they are offered to the public. It's a way to keep the ownership structure of the company more consistent and protect current shareholders.

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How can Class Share Rights be Varied?

Changing the rights attached to a class of shares needs either a provision in the company's articles or the consent of a specified percentage of shareholders within that class.

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Study Notes

Corporate Finance - Equity Financing vs. Debt Financing

  • Companies finance activities through profits, new shares (equity financing), or loans (debt financing).

  • Equity financing involves issuing new shares to existing or new investors. Public companies do this on the stock market, private companies don't.

  • Debt financing involves borrowing from lenders.

  • Equity vs. Debt:

    • New investors often bring expertise.
    • Equity investors dilute existing owners' ownership and potentially voting rights.
    • Debt requires repayment regardless of company performance.
    • Debt is usually more expensive (principal plus interest).

Shares

  • Shares are personal property (moveable).
  • They grant ownership of the company.
  • Shareholders receive dividends (if declared).
  • Shareholders have voting rights (unless otherwise stated in company articles).
  • Shareholders have limited rights in insolvency.
  • Rights are defined in the company's articles of association.

Classes of Shares

  • Common/Ordinary shares:
    • Full voting rights.
    • Dividends only if declared by the board, and only when the company is profitable.
  • Preference shares:
    • No voting rights.
    • Dividends typically fixed, paid regardless of profits, but dependent upon board decision.
    • Return of capital in case of liquidation
    • Can't require company share buyback.
    • Cannot be converted to other classes of shares
  • Redeemable shares:
    • Potential voting rights (dependent on company articles).
    • Dividend rights.
    • Return of capital in winding up.
    • Right to force the company to buy back the share.
  • Convertible shares:
    • Can be converted into other shares or debentures.
  • Cumulative shares:
    • Unpaid dividends accumulate over time.
  • Deferred shares:
    • Receive dividends/payment only after all other shareholders have received their dividends, usually relevant to companies in liquidation.
  • Deadlock shares:
    • Designed to facilitate resolution in situations with shareholder disputes.
  • Non-voting shares:
    • Don't grant voting rights.
  • Weight voting shares:
    • Grant differing voting rights based on the number of shares held.
  • Bearer shares:
    • Ownership is not registered.
  • Treasury shares:
    • Shares repurchased by the company.
  • Bonus shares: Shares issued as a dividend of profits.
  • Nominal value
    • All limited companies with share capital must have a fixed nominal value per share.
    • Imaginary value for owners' stake.
    • Commonly 1p, but can be another amount.
    • Market value shows the true worth.

Nominal Value Issues

  • While nominal value is used initially when shares are issued, the market value changes over time; therefore, directors who issue shares solely based on nominal value, may be in breach of their duties.

Class Share Rights Variation

  • Class share rights can only be varied in accordance with conditions in the company's articles, or with consent from the holders of shares in that class.
  • If no provisions exist, consent from the entire class is required.
    • Example: Tech Innovators Ltd. has provisions outlining the necessary consent procedures required for varying rights in a particular class of shares.

Allotment and Issue

  • Allotment is the right to be added to the register of members.
  • Issue is the act of adding a member to the register.

Pre-emption Rights

  • Existing shareholders have the right to subscribe to new shares proportional to their existing holdings.
  • These rights do not apply to new preference shares, some bonus shares, or special employee schemes.

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Description

Explore the key differences between equity financing and debt financing in corporate finance. This quiz covers essential aspects like ownership, investor rights, and repayment obligations. Test your understanding of how companies fund their activities through various financial strategies.

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