5B Into the Big Time Public Limited Companies

Into the Big Time 5B Sole traders and partners are always under the pressure of unlimited liability This means if their business fails, they may have to sell off their private assets (house, car) in order to pay off business creditors There is a type of business organisation where this is not the case The Public Limited Company

Into the Big Time 5B A Public Limited Company sells shares to the public on the Stock Exchange to raise capital This allows the PLC to become a very big firm In return for their investment, shareholders are owners and hope to receive an annual dividend (return on capital invested) out of the profits of the business The shareholders/investors risk no more than their investment This means they are said to have limited liability Their private assets are not at risk A PLC is run by a Board of Directors chosen by the shareholders

Into the Big Time 5B There are 2 main types of shareholder/investor in a PLC: Ordinary Shareholders – they receive a variable dividend each year, set by the Board of Directors and dependent on the amount of profits made that year. These shareholders take more risk because low profits mean a low, or no, dividend. Preference Shareholders – receive a fixed dividend every year whether the profits are high or low. They are paid out before the ordinary shareholders and therefore they take very little risk.

Into the Big Time 5B One other type of investor buys Debentures Debenture holders are not owners but lenders As lenders, debenture holders are paid interest which is treated as an expense and is paid out before any shareholders Debentures holders therefore take the least risk of all the investors

Into the Big Time 5B The Final Accounts of a PLC, like the Partnership, consist of: Trading & Profit & Loss & Appropriation Account and Balance Sheet

Into the Big Time5B The PLC has to state the maximum number of shares it will issue – Authorised Share Capital The company does not have to put all of these up for sale straight away It can issue these/put them up for sale, in stages The value of shares currently sold is known as - Issued Share Capital

Into the Big Time 5B The Board of Directors may have decided it wants to raise a total of £1,000,000 capital made up of: £1 Ordinary Shares = £500,000 £1 10% Preference Shares = £300,000 £1 10% Debentures = £200,000 £1,000,000 Every year Debenture Interest of 10% x £200,000 is paid to Debenture holders out of Gross Profits ie Debenture Interest like any loan interest is an expense in P&L A/C Also, 10% x 300,000 Dividend must be paid to Preference Shareholders out of Net Profit in the Appropriation Account 200, ,000 Assuming all the above shares and debentures are issued/sold:-

Into the Big Time 5B The Appropriation Account of a PLC shows how the Board of Directors intend appropriating/allocating the Net Profit. Gross Profit £170,000 Less Expenses ( incl Debenture Interest of £20,000) 70,000 Net Profit 100,000 Add Unappropriated Profit from last year 20, ,000 Less Preference Share Dividend (10% x 300,000) 30,000 Ordinary Share Dividend (15% x 500,000) 75, ,000 Unappropriated Profit for this year ended … £ 15,000 If the Directors want to earmark some profits to put into a reserve it would be done here, thereby reducing the unappropriated profits

Into the Big Time 5B Any profits not allocated in the Appropriation Account are held as reserves for reinvestment by the Board of Directors in eg a General Reserve Reserves can be named to indicate how they are to be used eg a Capital Reserve Will be used to replace Fixed Assets when necessary All Issued Share Capital, Reserves, Unappropriated profits and loans (including debentures) are all sources of finance and are shown in the ‘Financed by’ section of the PLC’s Balance Sheet

Bannerman Industries PLC - Balance Sheet as at 30 June 2006 At Cost(£000)Agg Dep(£000)NBV(£000) Fixed Assets Current Assets215 Less Current Liabilities 50 Working Capital 165 £1,015 Financed by: Authorised Share Capital: £1 Ordinary Shares 500 £1 10% Preference Shares Issued Share Capital: £1 Ordinary Shares 500 £1 10% Preference Shares Reserves and Unappropriated Profit ,000 10% Debentures 200 £1,015

Key Words 5B Limited Liability – investors risk no more than their shares Shareholder – someone who holds Preference/Ordinary shares Ordinary Shares – come with voting rights but more risky as dividend is decided by Board of Directors and determined by level of Net Profit each year Preference Shares – fixed dividend paid out annually and before Ordinary Shareholders so less risky than Ordinary Debentures – loans paying out an annual fixed rate of interest. Debenture Interest is an expense paid out of Gross Profit so this is the least risking investment Reserves – profits set aside for use later eg Asset Reserve Unappropriated Profit – profit not allocated to any use, carried forward to the next financial year