Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

4
...
A limited company may be owned by just one
person, but most have more than one owner and some have many owners, which are called
members or shareholders
...
Each owner or shareholder owns one or more shares in the company
...
This has no connection with the business entity convention
...
The legal separateness of the limited
company leads to two important features
...
The charge for tax, also named corporation
tax is shown in the income statement and it is based on that year’s profit
...

The percentage rate of corporation tax has been set to 20% of the taxable profit since 1
April 2015
...
This listing can have certain disadvantages as well:
•
•
•
•

strict rules are imposed (additional requirements for levels of financial disclosure apart
from those imposed by IFRS
financial analysts and journalists tend to monitor closely the activities of the listed
businesses (not welcomed when sensitive issues or operational problems occur)
listed businesses are pressured to perform well over the short term (thus not undertaking
projects with only long term benefits)
high costs of obtaining and retaining a listing

efficient capital market = when share prices at all times reflect all available and relevant
information;
Prices are set in capital market by the forces of supply and demand
...
The evidence of efficiency on most capital markets is that:
1
...
any information that is only privately available is not necessarily taken into account
in the share price

EQUITY = SHARES + RESERVES
...

ordinary shares = basic units of ownership of a business; issued by all companies, often
referred to as equities
Ordinary shareholders are the main risk takers as they share in the profits of the company
only after other claims have been satisfied, thus the rewards available reflect the risks they are
willing to take
...
Power usually rests in
their hands and only they are given the voting rights on issues that affect the company (they form
the backbone of the company)
The nominal values of such shares is at the discretion of those who start up the company
...
In practice, £1 is the normal maximum nominal value
...

preference shares = these guarantee that if a dividend is paid, the preference
shareholders will be entitled to the first part of it up to the maximum value (a fixed percentage
of the nominal value of the preference shares)
Holders of preference shares are given a right to a fixed dividend before ordinary
shareholders receive a dividend
...
Reducing the
number of shares and increasing their nominal value to compensate is known as a share
consolidation
...

Where a company issues shares at above their nominal value, UK law requires that the
excess of the issue price over the nominal value be shown separately
...
New shares arising from such a conversion are known as bonus shares
...
The transaction has no effect on the company’s assets or liabilities and will not lead to
an injection of cash for a company
...

Companies can ‘call’ for further instalments until the shares are fully paid shares
...
The part that has
been called and paid is known as paid-up share capital
...
Most companies borrow money to
supplement what raised from share issues and ploughed-back profits
...

The contract specifies the rate of interest, payments date and repayment date
...

Many companies borrow in such a way that individual investors are able to lend only part
of the total amount required
...
Investors do not have to wait the full term of their
loan for the repayment
...
These are
known as loan stock or debentures
...
The level of discount applied varies
...
At the same time, it might also convey the
impression that the business is desperate for funds and in distress
...
The former implies shares being sold to an issuing house which then sells
them on to potential investors, while the latter implies shares being sold directly to potential
investors
...
Some share issues by listed businesses arise from the initial listing of the
business, often known as an initial public offering (IPO)
...
IPOs are more popular than SEOs
...
In the same way that profits increase equity losses reduce it
...
They are also named retained earnings,
which represent the largest source of new finance for UK companies
...
Reserves
do not represent a cash balance that has been retained within a company
...
However, there are some differences of detail

---