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Basics of financial management Chapter 7

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1 Basics of financial management Chapter 7

2 Equity (owner’s equity)
Equity = contributed capital Sole proprietorship Partnership Equity = share capital + reserves Joint stock company

3 Share Participation in the capital (equity) of a joint stock company Share Ownership Control Financing Profit distribution (dividend)

4 Types of shares Ordinary shares Preferred shares Privileges Control
Additional rights with regard to controlling interests Control Preference in dividends Profit distribution

5 Dividend Profit distribution to shareholders Time Form Cash dividend
(in cash) Stock dividend (in shares) Time (during financial year) Interim dividend (end of financial year) Final dividend

6 Share value Par value Book value Intrinsic value Market value
Value on the balance sheet Par value Assets - liabilities Book value Present value of forecasted profits Intrinsic value Value at stock exchange on the basis of supply and demand Market value

7 Reserves Open reserves Hidden reserves Share premium  share issue
Retained earnings  not distributed profit Revaluation reserve  increase of asset value Open reserves Do not appear on the balance sheet Size unknown Example: low valuation of asset Hidden reserves

8 Increase of equity in a PLC
 Retained earnings Retaining profit  Share capital share premium Share issue Private placement Direct issue to existing or new shareholders Public offering Open subsciption Rights issue

9 Existing shareholders have priority
Rights issue of shares Existing shareholders have priority Subcription right Right value

10 Risk of share issue failure
Guichet emissie Company bears the risk Underwritten issue Banks bear the risk

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