Equity - Lecture notes 3 PDF

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ACCT1511...

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3. Equity CONTRIBUTED EQUITY SHARE CAPITAL: What we put in.   

Represents contributions by shareholders of company "cash in return for Shares" Regulated by corporations act 2001

Types of shares you will see traded on share markets:  Ordinary o Full voting rights o Right to receive dividends  Preference o Receive dividend based on fixed percentage o Reduced voting right o May be redeemable (e.g. cash) o They have a guaranteed amount of dividend per year, and if it isn't declared, it carries forward into the next year. **preferred shares are given first before ordinary.

Share issue procedure 1. Offer 2. Applications to buy 3. Allotment of shares Three illustrations: 1. Issue to an institutional investor/private placement  These people know what they're doing -- don't need prospectus to protect them from fraud.  They've got a lot of money to spend. Why private?  There's less costs  Firm "too young" to gain access to public markets: "the venture capitalist"

2. Issue to general public, payable in full on application -- Initial Public offering (IPO) Why public?  Gives access to more funding than private placement  'float' to gain the desired capital structure  Outgrowing venture capital  Seeking listing on an exchange  Take advantage of investors who have money 1. Application received

Cash Trust: cash account that is restricted (legal limitations with what we can do on this account) Application: a liability account 2. Shares Allotted

One shares are issued, they have voting rights

3. Issue to general public, payable by instalment Issue to general public by way of prospectus, payable in instalment

1. Application

2. Allotment

Allotment is an equity account but think of it like a receivable (because they have to pay us that amount) SO when they pay us:

3. Call

Call is an equity account but think of it like a receivable (because they have to pay us that amount) 2 Potential Situations 1. Under-subscription o Too few applicants o Shares can still be allotted, provided minimum subscription condition is met o If not share issue must be abandoned o No accounting complications if there is an underwriter Underwriter:  Stockbroker or financial institution guarantees to purchase any shares that company cannot sell during the issue period.  Ensure the share issue is successful  Will charge the company a fee  Are able to sell the shares they purchase later on the market.

2. Over-subscription o More applications are received for shares than the shares available in the share offering o Directors decide who and how much applicants are to receive o When applicants are allotted fewer shares than applied: 1. Company may keep the excess application monies and apply them to allotment or future calls 2. Return monies to unsuccessful applicants

Subsequent share issues Right issues:  Shares are offered in ratio to a member's existing holding, usually below market price  Members can sell 'the right' of purchase: renounceable rights issue Bonus issues Share options (common form of compensation)  To give the holder the right to purchase an agreed number of shares at a later date, and at a fixed exercise price.

RETAINED PROFITS: What the company has made (profits) for shareholders.

Dividends Represents distribution of profits to shareholders (NOT EXPENSE!)  Reduce owners' equity  May be interim or final  Can only be paid out of profits

RESERVES: Direct adjustment to equity Revaluation Reserve

General Reserve

(general reserve is just a re-classification of equity) General reserve just says "we are setting this money aside" for whatever purpose.

Foreign Currency Translation Reserve  Direct adjustments to equity resulting from foreign currency translation of assets and liabilities

Bonus issues    

Also known as share/stock dividends Giving away shares to existing shareholders in proportion to existing holdings E.g. 1:4 bonus issue give one new share for each 4 currently held No cost to shareholders

Share splits     

Increases the number of shares E.g. 2:1 share split would double the number of shares No cost to shareholders We can do a reverse split share Reduced share price makes the shares accessible to more investors

Share buy-backs "reverse" of share issue

  

Repurchased shared must be cancelled Reduces issues share capital Must not be unfair to different classes of shareholders

Fixed tender or buy at market   

Market signal that company is undervalued Capital structure management by reducing equity Efficiently manage surplus funds held by company rather than paying dividends or reinvesting in new ventures....