Equity Transactions, Dividends, and Debentures

• Share companies account for their transactions using standard accounting principles, but with specific considerations for equity transactions, dividends, and debentures.

Equity Accounting

• Share capital represents the funds raised by a company through the issuance of shares.
• Ordinary shares provide voting rights and a residual claim on the company's assets after all other claims have been settled.
• Preference shares have priority over ordinary shares in terms of dividends and asset distribution but may have limited or no voting rights.
• Share premium arises when shares are issued at a price above their par value.
• Retained earnings represent the accumulated profits that have not been distributed as dividends.
• Treasury shares are a company's own shares that have been repurchased from the market and are held for potential reissuance or cancellation.

Debentures

• Debentures are long-term debt instruments issued by a company to raise capital.
• Debentures typically pay a fixed rate of interest over a specified period.
• Debentures can be secured (backed by specific assets) or unsecured (backed by the company's general creditworthiness).
• Debenture accounting involves tracking the issuance, interest payments, and redemption of debentures.
• Debenture valuation involves determining the fair market value of debentures based on factors such as interest rates, credit risk, and time to maturity.

Dividend Distribution

• Dividends are distributions of a company's profits to its shareholders.
• Dividends can be paid in cash, shares, or other forms of assets.
• Dividend policy is determined by the company's board of directors and is influenced by factors such as profitability, cash flow, and investment opportunities.
• Dividends are typically paid out of retained earnings.
• A dividend declaration creates a liability for the company.
• Different dates are associated with dividends, including the declaration date, record date, and payment date.

Financial Statements

• Financial statements provide a summary of a company's financial performance and position.
• The key financial statements include the income statement, balance sheet, and statement of cash flows.
• The income statement reports a company's revenues, expenses, and net income or loss over a period of time.
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
• The statement of cash flows tracks the movement of cash both into and out of a company over a period of time, categorized by operating, investing, and financing activities.
• Financial statements are prepared in accordance with accounting standards such as IFRS or GAAP.

Shareholder Equity

• Shareholder equity represents the owners' stake in the company's assets after deducting liabilities.
• Shareholder equity includes share capital, share premium, retained earnings, accumulated other comprehensive income, and treasury shares.
• Changes in shareholder equity can occur due to issuance of shares, repurchase of shares, dividend payments, and net income or loss.
• A statement of changes in equity reconciles the beginning and ending balances of each component of shareholder equity.

Debenture Valuation

• Debenture valuation involves estimating the fair market value of a debenture.
• The value of a debenture is the present value of its expected future cash flows, including interest payments and the principal repayment.
• The discount rate used to calculate the present value reflects the debenture's credit risk and prevailing market interest rates.
• Factors affecting debenture valuation include interest rate changes, credit rating downgrades, and changes in market liquidity.

Capital Structure

• Capital structure refers to the mix of debt and equity that a company uses to finance its assets.
• Capital structure decisions are influenced by factors such as the company's industry, size, growth prospects, and risk profile.
• Debt financing can provide tax benefits due to the deductibility of interest expense, but it also increases financial risk.
• Equity financing does not create a fixed obligation to make payments but dilutes existing shareholders' ownership.
• The optimal capital structure is the one that minimizes the company's cost of capital and maximizes its value.
• Theories of capital structure include the Modigliani-Miller theorem, the trade-off theory, and the pecking order theory.
• The Modigliani-Miller theorem states that in a perfect market, the value of a company is independent of its capital structure.
• The trade-off theory suggests that companies choose a capital structure that balances the benefits of debt financing with the costs of financial distress.
• The pecking order theory states that companies prefer to finance with internal funds first, then debt, and finally equity as a last resort.