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Financing of Companies

Financing of Companies. Shares I 2.3.1 – 2.3.3. Classes of shares. Ordinary shares and Preference shares Two major differences: Dividend : fixed for preference shares Voting rights : only for ordinary shares Appointment of directors and auditors Whether to accept the dividend proposed

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Financing of Companies

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  1. Financing of Companies Shares I 2.3.1 – 2.3.3

  2. Classes of shares • Ordinary shares and Preference shares • Two major differences: • Dividend : fixed for preference shares • Voting rights : only for ordinary shares • Appointment of directors and auditors • Whether to accept the dividend proposed • Changes in the company’s constitution (memorandum and articles of association)

  3. Preference shares • ‘4% preference dividend RM0.25’ • Dividend paid before ordinary shares • Cumulative : dividend carried forward • Redeemable : company will buy back ‘4% preference dividend RM0.25,2020’ • Participating : right to participate in, or receive, additional dividend over and above the fixed dividend • Convertible : option to convert to ordinary shares

  4. How do we issue shares • Through issuing house : • Malaysian Industrial Development and Finance Consultancy and Corporate Services Sendirian Berhad : MIDFCCS • Malaysian Issuing House : MIH • Underwriter : subscribe the unsubscribed • Financial Institution and Merchant banks

  5. Issuing at: Ordinary shares having a face value of RM2 • PAR : issue at RM2 each Dt Cash 2 Cr Ord Shares 2 b) PREMIUM : issue at RM2.40 each Dt Cash 2.40 Cr Ord Shares 2 Cr Sh. Premium 2 c) DISCOUNT : issue at RM1.70 Dt Cash 1.70 Cr Ord. Shares 2 Dt Sh. Discount 0.30

  6. Issuing at Premium • Sect 60(2) : ‘share premium account’ • Sect 60(3) : may be use for • paying for bonus shares • paying for balance unpaid by members • dividend in the form of shares • writing off : preliminary expenses and expenses in connection with issue shares • premium payable on redemption

  7. Issuing at Discount • Sect 59(1) : conditions • By resolution and confirmed by court • Specifies maximum rate of discount • Not less than one year after commencing business • Issued within a month after confirmed by law or extended time as court allows

  8. Authorised, Issued and Called-up capital • Authorised – MoA • Issued – actually been issued • Called-up – once issued and payment made e.g. Balada PLC has authorised capital of 25m shares at a nominal value of $50m and has issued capital of 5m shares at a nominal value of $10m. Out of $10m capital, only half of it has been called and paid for.

  9. Subscription : under • shares subscribed > shares available - deal with what subscribed, the rest issue later OR if too little, offer withdrawn e.g. 90,000 applied for vs. 200,000 available  record only for the 90,000 applied OR  refund all applicants

  10. Subscription : over • Over : shares subscribed < shares available a) cut off rule : first come first serve b) in proportion to their application e.g. 200,000 applied for vs. 100,000 available  A [50,000], B [80,000], C [70,000] a) A [50,000], B [50,000 + reject 30,000], C reject all b) A [5/20 = 25,000], B [8/20 = 40,000], C [7/20 = 35,000]

  11. Accounts’ rules • Cash a/c Or Bank a/c • Application and Allotment a/c transfer to Capital a/c only after allotment ************************************* • Capital a/c = always at nominal value • Premium / Discount a/c = the premium/discount whatever received

  12. Method • In Full • Process end after allotment • By Installment • Does not stop at allotment • Involved ‘calling’ • Involved Call a/c, Accrued Call a/c and Prepaid Call a/c [by case] Discuss Example

  13. PAR • Cash received on application = RM1 x 120m = RM120m • Cash refund on allotment = RM1 x 50m = RM50m • Cash received on allotment = RM30m [RM50m – RM20m] • Total capital after allotment = RM100m

  14. Journal • On application: • Dt Bank 120m Cr App 120m • On allotment: • Dt App 50m Cr Bank 50m • Dt App 20m Cr Allot 20m • Dt Bank 30m Cr Allot 30m • After allotment: • Dt App 50m Cr OSC 100m • Dt Allot 50m

  15. PREMIUM • Cash received on application = RM1.70 X 120m = RM204m • Cash refund on allotment = RM1.70 x 50m = RM85m • Cash received on allotment = RM16 [RM50m – RM34m] • Total capital = RM100m • Total premium = RM70m

  16. Journal • On application: • Dt Bank 204m Cr App 204m • On allotment: • Dt App 85m Cr Bank 85m • Dt App 34m Cr Allot 34m • Dt Bank 16m Cr Allot 16m • After allotment: • Dt App 85m Cr OSC 50m Cr Sh. Premium 35m - Dt Allot 50m Cr OSC 50m

  17. DISCOUNT • Cash received on application = RM1 x 120m = RM120m • Cash refund on allotment = RM1 x 50m = RM50m • Cash received on allotment = RM15m [RM35m – RM20m] • Total capital = RM100m • Total discount = RM15m

  18. Journal • On application: • Dt Bank 120m Cr App 120m • On allotment: • Dt App 50m Cr Bank 50m • Dt App 20m Cr Allot 20m • Dt Bank 15m Cr Allot 15m • After allotment: • Dt App 50m Cr OSC 50m • Dt Allot 35m Cr OSC 50m Dt Sh. Discount 15m

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