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Equity Finance Condensed Notes
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Chapter 5 – Equity Finance: Issue and Allotment of Shares SGS 8 – Equity Finance (Issue and Allotment of Shares)Capital – funds available to run the business of a company
Share capital – money raised by the issue of shares
Working capital – funds needed to keep the business growing
Growth capital – funds needed for expansion and growth
There are two incentives for investing in shares –
1. Receipt of income – by way of dividends
2. Capital gain – by way of growth in value of company and its shares
Red Lion Ltd issues 100 ordinary shares of £1 each for cash on incorporation –
Red Lion Limited Balance Sheet as at 31 March 2020
Before issue After issue
ASSETS (cash) 0 100
Less LIABILITIES (0) (0)
NET ASSETS 0 100
SHARE CAPITAL 0 100
RETAINED EARNINGS 0 0
SHAREHOLDER FUNDS 0 100
Red Lion Ltd issues an additional 100 £1 ordinary shares for 150p each in cash (premium of 50p) –
Red Lion Limited Balance Sheet as at 31 May 2021
Before issue After issue
ASSETS (cash) 100 250
Less LIABILITIES (0) (0)
NET ASSETS 100 250
SHARE CAPITAL 100 200
SHARE PREMIUM ACCOUNT 0 50
RETAINED EARNINGS 0 0
SHAREHOLDER FUNDS 100 250
NB: premium must be shown in a separate account (s.610(1))
Share Capital Structure
Nominal value The minimum subscription price for a share (commonly 1p, 5p or £1)
(or par value) Nominal value represents a unit of ownership, rather than the actual value for the share
Shares in a limited company must have a fixed nominal value (s.542(1))
An allotment of shares without a fixed nominal value is void (s.542(2))
An allotment of shares cannot be at a discount to its nominal value (s.580)
Premium The excess value over nominal value
Issue share capital The number of shares in issue at any time
The issue share capital is made up of –
Subscriber shares – shares purchased by the first members of the company
Further shares issued – shares issued after the company has been incorporated
Paid-up share capital The amount of nominal value paid
New shareholders do not have to pay the full amount of their shares immediately (increasingly rare)
The company may demand (or call) the outstanding amount at any time
Called-up share capital The aggregate of the paid-up share capital and the sum of outstanding capital called
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