Advantages of rising finance by issuing shares

TYPES OF LONG TERM FINANCE

1. Issuing shares

A company can raise capital by issuing shares. There are two types of shares – ordinary or equity shares and preference shares.

Advantages of rising finance by issuing shares

• The money given for shares need not be returned to the shareholders.
• No need of keeping a security for shares.
• The ordinary shareholders are paid dividend only if there is sufficient profit.
• The company can keep some shares to sell in future. So that if the company needs finance in future, those shares can be sold.
• Preference shares are paid fixed rate of dividend. Even if the company makes very high profit, preference shares will be paid same amount of dividend every year.
• Unlike debenture holders, shareholders cannot force the company into liquidation.

CALCULATION OF SHARE DIVIDEND:

A company issued the following shares, which were fully paid up for:

6.5% Preference shares           200,000 @ $0.50

         Ordinary shares                200,000 @ $1.00

The company also issued debentures worth $150,000, which carried an interest of 8%. The net profit available for distribution before paying the debenture interest was $45,000. The company decides to distribute three fourths of the net profit to the shareholders and to keep the balance as ploughed back profit.

Calculate:

Rate of dividend per ordinary share.

Profit                                                                                       $ 45,000

            Debenture interest (150,000x8/100)=                              $ 12,000

            Balance Net profit                                                                $ 33,000

 

            Profit to be distributed to shareholders:

                                    $ 33,000x3/4=                                               $ 24,750

            Preference share dividend $100,000x6.5/100=             $   6,500

            Profit to be given to ordinary shareholders                     $ 18,250

 

            Dividend per ordinary share ($18,250/200,000)=          $ 0.09

            Rate of dividend per ordinary share=

                        Dividend per ordinary share x 100

                        Value per ordinary share

                        $ 0.09 x 100 =       9%

                              $1.00