Types of Shares: Preference, Founder's, Bonus

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Questions and Answers

Explain why participating preference shares are generally more attractive to investors than non-participating preference shares, assuming the company performs exceptionally well.

Participating preference shares allow shareholders to share in surplus company profits, leading to higher dividends when the company performs well, whereas non-participating preference shares only provide a fixed rate of dividend, regardless of the company's profitability.

Describe a situation where a company might issue bonus shares instead of paying out dividends in cash.

A company might issue bonus shares if it wants to conserve cash for reinvestment in the business or to improve its financial stability, while still rewarding shareholders with increased equity in the company.

Explain why cumulative preference shares might be seen as a safer investment than non-cumulative preference shares.

Cumulative preference shares provide shareholders with the assurance that any unpaid dividends will be compensated for in the future, whereas non-cumulative preference shares do not offer this guarantee, making them riskier if the company experiences periods of low profitability.

What is the key difference in the timing of dividend payments between founder's shares and preference shares?

Preference shareholders are paid dividends before ordinary shareholders, and founders shares receive dividends only after all other shareholders are paid. Signup and view all the answers

Explain how convertible preference shares could benefit an investor if the company's ordinary share price increases significantly.

If the company's ordinary share price increases significantly, the investor can convert their preference shares into a predetermined number of ordinary shares, potentially realizing a substantial capital gain if the value of the received ordinary shares is higher than the original investment in preference shares. Signup and view all the answers

Why might a company choose to issue redeemable preference shares instead of non-redeemable preference shares?

A company might issue redeemable preference shares to have the option of buying back the shares at a fixed price on a specified date, allowing them to manage their capital structure and potentially reduce dividend obligations in the future. Signup and view all the answers

Describe a situation where restricted voting rights for preference shareholders might become relevant and impactful.

Restricted voting rights for preference shareholders become impactful during critical company decisions like mergers, acquisitions, or major restructuring, where their limited voting power might prevent them from influencing the outcome, even if it significantly affects their investment. Signup and view all the answers

Explain why debentures are considered a form of borrowed capital for a company.

Debentures represent debt owed by the company to debenture holders, who are essentially creditors. The company is obligated to repay the principal amount of the debentures, making it a form of borrowed capital. Signup and view all the answers

Describe the role of a company's board of directors in managing and deciding dividend payments.

The board of directors assesses the company's financial performance, determines the amount of dividends to be paid, and proposes the dividend policy, which is then subject to approval by the shareholders through their voting rights. Signup and view all the answers

Explain the concept of capital gains tax and provide an example of when it would be applicable.

Capital gains tax is a tax levied on the profit earned from selling an asset (property, fixed assets, or investments) that has increased in value since its purchase. For example, if you buy a stock for $50 and sell it later for $75, the $25 profit is subject to capital gains tax. Signup and view all the answers

If you have a choice between investing in an account that pays simple interest versus one that pays compound interest, and you plan to leave the money invested for a long period, which would you choose and why?

I would choose the account that pays compound interest, as it calculates interest on the original principal plus accumulated interest, leading to exponential growth over time and a higher overall return compared to simple interest, which only calculates interest on the original principal. Signup and view all the answers

Explain how compound interest leads to a higher return on investment compared to simple interest, assuming all other factors are equal.

Compound interest results in a higher return because interest earned in each period is added to the principal, and subsequent interest is calculated on this increased amount. This 'interest on interest' effect accelerates the growth of the investment compared to simple interest, where interest is only calculated on the original principal. Signup and view all the answers

Why is it important for investors to understand the difference between simple and compound interest when making investment decisions?

Understanding the difference allows investors to accurately project their returns and choose investments that best align with their financial goals, as compound interest yields significantly higher returns over time, especially for long-term investments. Signup and view all the answers

Explain the difference between ordinary shares and preference shares regarding dividend payments and voting rights.

Ordinary shares receive dividends only when the company is profitable, and shareholders typically have full voting rights. Preference shares may receive dividends regardless of profitability, and have restricted voting rights. Signup and view all the answers

Differentiate between redeemable and non-redeemable preference shares, focusing on the implications for both the issuing company and the shareholder.

Redeemable preference shares grant the issuing company the option to buy back the shares, offering flexibility in capital management but potentially limiting the shareholder's long-term investment. Non-redeemable preference shares lack this buy-back provision, providing shareholders with a more stable, long-term investment but committing the company to long-term dividend obligations. Signup and view all the answers

Flashcards

Preference Shares

Shares that receive dividends regardless of company profit; a fixed rate of return is paid. Voting rights may be restricted.

Rights of Preference Shareholders

Shareholders receive dividends regardless of profits, have a fixed rate of return, preferential rights to dividends, a preferred claim on company assets during liquidation and receive company reports.

Founder’s Shares

Shares issued to the founders and incorporators of the company; dividends are received after all other shareholders.

Bonus Shares

Shares issued as a payment to shareholders, often as compensation for unpaid dividends creating more shares for future dividends paid at no cost to the shareholder.