Learning Area 2

1. Learning Area 2 Chapter 6: Issue of shares Lecture 3

2. 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!!

3. 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

4. 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)

5. 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 6.7 Calculate 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

6. 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

7. Homework • Example p25 Script issue – Impact • Question 6.8 p29 Reasons • Ignore question 6.9 (only applicable for to the second semester)

8. 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!!!!

9. EXAM • Tuesday 10 June 2014 • Will announce the time and venue on ClickUP • Scope: All the work!!! Learning Areas 1 – 9 Chapters 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 questions Theory questions (between 5 and 10 marks per question) Calculations

10. 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