LEARNING AREA 2Chapter 6: Issue of shares Lecture

3

2. Scrip issues p24(“bonus / capitalisation” issues)

Where company gives free shares to all ordinary shareholders in proportion to their existing holding.

Impact: New shares No money raised Total value of the company do not change The price per share fall in proportion to the increase in

the number of shares Total holding per investor is unchanged Part of reserves (retained earnings) per BS changes to

share capital Read thoroughly through example p25!!

2. Scrip issues p26

Purpose of scrip issues Marketability – more lower priced shares Extra free shares… Interpreted as successful…sufficient profits Since scrip issue decreases share price

hence reduces possibility of future rights issue - directors must be confident about future prospects of company

Dividends – depends on dividends per share Higher share capital e.g. listing

requirements

2. Scrip issues p27

Disadvantages: Cost to the company

Administrative costs Cost to everyone else

Additional effort (costs) to calculate e.g. capital gains (need to eliminate the artificial effect of a script issue)

2. Scrip issues p28

Impact on the share price:n for m scrip issue reduces P (share price) to:

P’ = P * m/(m+n)Where m = number of shares held Where n = for every 3 shares held s/h receives 1

extra

Question 6.7Calculate the theoretical share price of a 1 for 3 scrip

issue, with a current share price of 250c. P’ = 250c * 3/(3+1)

= 187.5c

2. Scrip issues p29

Scrip dividend means that a company pays shareholders a dividend by giving them new shares rather than cash

There are two cases:- Everyone accepted the scrip dividend, or- Choice between scrip dividend and a

cash dividend: effect – scrip dividend worth as much as cash dividend

Homework

Example p25 Script issue – Impact

Question 6.8 p29 Reasons Ignore question 6.9 (only

applicable for to the second semester)

Semester test 2

Marks for Semester test 2 and class test 2 will be included in the semester mark on ClickUP

Please check your paper now!! And if you have any concerns please come and see me after class.

Important the semester marks needs to be finalised!!!!

EXAM Tuesday 10 June 2014 Will announce the time and venue on ClickUP Scope:All the work!!! Learning Areas 1 – 9Chapters 1; 2; 3 (UK notes plus RSA slides); 6; 7; 8; 9; 10; 11; 12 & 13 Total marks : 80 marks Duration: 2 hours (120 minutes) EXAM paper:Multiple choice questionsTheory questions (between 5 and 10 marks per question)Calculations

EXAM Please note that the exception

for FBS 112 is only applicable to the exam paper!

If you miss the exam and write the supplementary due to illness you will not get the exemption!!!!

60% exam mark is required for exemption