Capital Structure

Question 1

Define par value, authorised capital and issued capital

Answer 1

par value/ nominal value - the ‘face value’ of shares (value of shares when it becomes a legal company)

authorised capital - the max amount of share capital that a company is allowed to issue

Issued capital - the par amount of shares that has been issued to shareholders

Question 2

What’s the difference between ordinary share capital and preference share capital

Answer 2

Ordinary shares carry no right to a fixed dividend but are entitled to all profits left after payment of preference dividends

Preference shares carry the right to a final dividend which is expressed as a % of their par value

Question 3

What is redeemable preference shares

Answer 3

Shares company will repay the nominal value of at a later date (treated like loans)

Question 4

What is irredeemable preference shares

Answer 4

Shares are treated like any other shares

Question 5

What is the difference between a rights issue and a bonus issue

Answer 5

Rights issue are shares given to existing shareholders for a price lower than the market price

Bonus issue is issuing additional shares to existing shareholders at no cost, typically funded by retained profits or reserves. This method can serve as an alternative to cash dividends

Question 6

What’s the difference between capital reserves and revenue reserves and give an example of each

Answer 6

Capital reserves cannot be paid out as dividends but revenue reserves can

Capital reserve - share premium, revaluation reserve

Revenue reserve - retained earnings, general reserves

Question 7

What are loan stocks/ bonds

Answer 7

• long-term liabilities
• a means of raising finance, in the same way as issuing share capital raises finance
• Providers of loan capital are creditors
• Holders of loan capital are entitled to a fixed rate of interest
• Loan stock is often secured on company assets
• Interest calculated on the par or legal value of loan capital, regardless of its market value.
• Interest is usually paid half-yearly; examination questions often require an accrual to be made for interest due at the year-end.