Subject – Equity Shares

115 -Hiren Gabani133 -Rohit Gogdani 134 -Kaushik Lathiya132 -Kapil Patel 124 -Vishesh Kheni122 - Jigar Jivani135 - Jaydeep Limbasiya

• Presentation submit to Mrs.Swati Mehta

PRESENTED BY :-

Equity SharesPreference ShareDebentureRetained EarningsTerm LoanRight Issue

Sources of long term funds

Features of equity shares 1.Right to income : The equity investors have

residual claim to the income of company. The income left after satisfying the claims of all other investors belongs to equity shareholder. This income is simply equal to profit after tax minus preference shares dividend. The income of equity shareholders may be retained by the firm or paid out as dividends.

Equity earnings which are retained in firm tend to increase market value of equity shares & earnings distributed as dividend provide current income to equity shareholders.

Equity shares

Equity shareholders are owners of the firm. So they can elect the board of directors & have right to vote on every resolution passed before the company. The board of directors selects the management & management controls the operations of firm. Hence, equity shareholders indirectly control the operation of firm.

2. Right to control

The pre- emptive right enables existing shareholders to maintain their proportional ownership by purchasing the additional equity shares issued by company. According to law, existing shareholders have first priority to purchase additional shares on pro rata basis before the others. Ex. if company has 10,00,000 outstanding shares of equity & proposes to issue 3,00,000 additional equity shares, an equity shareholder owing 100 shares has the first right to purchase 30 of 3,00,000 new shares before those are offered to anyone else

3.Pre-emptive right

Equity shareholders have a residual claim over the assts of the firm in the event of liquidation. Claims of all others- debenture holders, secured lenders, unsecured lenders, other creditors, & preference shareholders – are prior to the claim of equity shareholders.

4.Right in liquidation

Evaluations from the view point of Company:

Advantages :

1. Permanent capital : it represents permanent capital. Hence there is no

liability for repayment.

2. No obligation to pay dividend : equity shares impose no obligation on the company

to pay a fixed dividend to the equity shareholders. They get dividend if adequate profits are available.

3. No charge on property : the company is able to procure capital without

creating charges on its property, which remain free & can be utilized when additional funds are required by the company.

Evaluation

4.Wide scope of marketability :

equity shares are lower denominations, hence they can be purchased by persons of limited income also. So there is a wide scope of marketability of equity shares.

5.High creditworthiness :

The equity capital increases the company’s financial base & thus it’s borrowing limit increase. Lenders generally lend in proportion to the company’s equity capital. By issuing Equity shares, the company increases its financial capability. It can borrow when it needs additional funds.

6.High premium :

the company can easily sell equity shares on premium in times of boom. Even in such circumstances , people are most eager to buy equity shares. Hence company can easily & quickly raise fixed capital through equity shares.

1. Cost of equity : cost of equity is generally highest. The rate of

return required by equity shareholders is generally higher than rate of return required by other investors.

2. Floatation cost : floatation cost means cost of issuing equity

shares, which is higher than cost of issuing other types of securities. Underwriting commission , brokerage costs & other issue expenses are higher for equity capital.

3. Interference in management : equity shareholders have voting rights. Hence

there may be interference in existing pattern of management.

Disadvantages

4. Speculation : there are the higher chances of speculation

because it is traded in stock market.

5. Dividend is not tax deductible : equity share dividend is not tax deductible payment

6. Dilution of control : Sale of Equity shares to outsiders may result in

dilution of control of existing shareholders

Advantages

1.Higher Dividend : The equity shareholders earn

more by way of dividend compared to other alternatives during prosperous time.

2.Voting Right : Equity shares holders have a

voting right. Shareholders can participate in the Management of company through voting right. They can vote for many important matters such as election of director& auditor, approval of dividend recommended by director.

Evaluations from the view point of Shareholders:

3.Capital Appreciation : Equity shareholders get the

benefit of capital appreciation, when boom condition prevail.

4.Right Shares : An Existing company has to offer

the new issue of its shares to existing shareholders as right shares on priority basis.

5.Good Liquidity Position : The liquidity position of Equity

shareholders is improved because these shares are freely traded in all national level stock exchanges.

1.Uncertain Return :

no fixed rate of dividend is to be paid to equity shareholders. Only directors have the authority to decide whether to declare dividend or not.

2.Residual Claim On Income As Well As Assets : equity shareholders have last priority on income

as well as assets after satisfying claims of others-- debenture holders, secured lenders, unsecured lenders, other creditors, & preference shareholders.

3.Low Market Value :

when low dividends are declared or postpone the dividend , the market value of equity shares decline & investors suffer a capital loss.

Disadvantages

4.Risky Investment : equity prices tend to fluctuate widely, so

making equity investment risky.5.Higher Speculation : During boom phase of stock market,

Equity shares may encourage too much speculation.

6.Dilution of Control : The issue of new Equity shares may

dilute the ownership & control of existing shareholders while a preemptive right to retain their proportionate ownership; they may not have funds to invest in additional shares.

• Authorized, issued, subscribed & paid-up capital :

the amount of capital that a company can potentially issue, as per its memorandum, represents the authorized capital. The amount offered by company to investors is called issued capital. The part of issued capital issued capital which has been subscribed by investors represents subscribed capital. The actual amount paid up by investors is called paid –up capital.

Important terms

• Per value, Issue price, Book value & Market value :

The per value of equity share is the value stated in the memorandum & written on share scrip. It is also called as face value. It is generally Rs. 10 or rs.100. infrequently, par value like re.1, Rs. 2, Rs.5 , Rs. 50 are available.

• The issue price is the price at which equity share is issued. When issue price exceeds par value, difference is referred to as the share premium.

• The book value of equity share =

Paid up equity capital + reserve & surplus

No. of outstanding equity shares

• The market value is the price at which it is traded in the stock market.

Thank you