Equity is generally referred to as shares, which is the capital vested by owners in the business. It is also the difference between the assets of the company and the liabilities it holds. Equity refers to ownership in the business i.e. the equity holders are the rightful voters in the decisions of the company, share profit and losses and have claim on the assets of the company.
Share Capital can be classified into two categories:
- Equity Share Capital
- Preferential Share Capital
Equity Share Capital
Authorized Share Capital
Authorised Share Capital is the number of shares a company can issue as per the Memorandum of Association (MOA) or Articles of Incorporation (AOI). Authorised Share Capital is not fully used as the company holds some shares for future needs.
Issued Share Capital
Issued share capital is the number of shares with the investors of the company. This is simply the monetary value of the shares of stock a company actually offers for sale to investors.
Subscribed Share Capital
Subscribed Share Capital is the share that the investors have promised to buy. When a company announces to go public by issuing stock, investors show interest and express the desire to participate. Subscribers are generally large institutional investors, corporations and banks.
Paid up Share Capital
Paid-up share capital is the money a firm has received from shareholders in exchange for shares. Paid-up capital is collected in the primary market when a company sells its share in the form of IPO.
Right Share Capital
Right Shares are the shares given or issued to the existing shareholders. Such shares are issued at discounted prices and issued to raise additional capital from the existing shareholders.
Bonus Share Capital
Bonus shares are also the shares given or issued to the existing shareholders. Such shares are issued free of cost and are issued to shareholders in the proportion of their holdings, out of profits and reserves. Bonus share is more taken as return for investment than for raising additional capital.
Preferential Share Capital
Cumulative Preference Share
A preference share is said to be cumulative when the arrears of dividend are cumulative and such arrears are paid before paying any dividend to equity shareholders. If there are no profits in any year, the arrears of dividend can be claimed in the subsequent years.
Non-Cumulative Preference Share
In the case of non-cumulative preference shares, the dividend is only payable out of the net profits of each year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years.
Participating Preference Share
Participating preference shares are those shares which are entitled in addition to preference dividend at a fixed rate, to participate in the balance of profits with equity shareholders after they get a fixed rate of dividend on their shares. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up. Such a right may be expressly provided in the memorandum or articles of association of the company.
Non- participating Preference Share
Non- participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits. The preference shares are presumed to be non-participating, unless expressly provided in the memorandum or the articles or the terms of issue.
Convertible Preference Share
Convertible preference shares are those shares which can be converted into equity shares within a certain period.
Non-convertible Preference Share
These are those shares which do not carry the right of conversion into equity shares.
Redeemable Preference Share
A company limited by shares, may if so authorized by its articles issue preference shares which are redeemable as per the provisions. Shares may be redeemed either after a fixed period or earlier at the option of the company.
Guarantee Preference Share
These shares carry the right of a fixed dividend even if the company makes no or insufficient profits.
Here is the SOLVED NUMERICAL PROBLEMS OF CAPITAL STRUCTURE APPROACHES