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Shares and convretible securities

Learning Outcomes: 1. Understand shares and convertible securities 2. Identify feature of ordinary share 3. Explore the key terms 4. Difference between ordinary and preference shares

This chapter is concerned with non debt sources of long term capital, namely equity finance, preference shares and convertible securities. In raising new funds, company management has to decide the extent to which it will raise debt, equity or hybrid forms of finance. Debt involves contractual commitments of interest payments and principal payments to lenders who are considered creditors of the company. Debt holders are not owners, and direct control of the borrowing company occurs only when their interest are in danger. Cont:-

Equity does not involve fixed financial claims on a company. Shareholder (the equity owners) purchase an interest in the company in return for dividends and capital gain. (A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price Hybrid finance is provided by a rang of securities that have characteristic of both debt and equity. The most famous securities are preference shares and convertible securities.

Ordinary shares
Involve shares involve ownership in the company. In effect, debt holders and preference shareholder can be views as creditors, while the ordinary shareholders are the true owners of the firm. Key areas a. Ordinary shares do not have the maturity date b. Exist as long as the form does c. Ordinary shares do not have upper limit on their dividend payments. d. Dividend must be declared by BOD e. OSH can not exercise claims on assets until the debt holders and Cont:preference shareholder have been satisfied.

Ordinary shares
Key feature of Ordinary shareholder: a. Claim on income b. Claim on assets c. Voting right d. Limited liability pre emptive right

Key Terms
Proxy A means of voting in which a designated party is provided with the temporary power of attorney to vote for the signer at the firms annual meeting. Pre emptive right The right entitling the ordinary shareholder to maintain his or her proportionate share of ownership in the firm. Floatation The first public issue of shares and/or debt by a company. Can be contrasted with secondary or subsequent issues. Stags Investors who purchase new shares through a prospectus and sell on the first day that the shares are quoted by the stock exchange, in an attempt to make a profit.

Preference shares
Subject to company legislation, a company has the power to attach different right to shares, and to create different classes of shares, including preference shares. The main characteristics that invariably separate preference shares from ordinary shares are a preferential right to the payment of dividends before other classes of shares, and often a preferential return of capital on the winding up of a company. Key features Multiple classes Dividend Redemption Claim on assets and income Protective provisions Convertibility

a. b. c. d. e. f.

Case studies/Research links/Study questions


Research links

Study questions
Study questions 19-1, 19-2, 19-3 Study Problems

Self test problem st1-st2