Chapter 6: Issue of shares Lecture 3

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!!

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

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)

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

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

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

 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!!!!

 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

 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