Issues for discussion_Financing Decisions and FS

2014

Financing Decisions
Equity financing
Debt financing
Accounting issues
Issue of capital
Distribution of dividend
Capital reduction
Capital:
a) Issues of shares:Public issue/Private issue/ Rights issue/bonus issue
Nominal Value (Face Value):

Value written on the face of the security

Dividend is calculated on the FV
Capital is always shown in the books at the face value
Issue price ( Premium/Discount/Par)
Price at which shares are sold by the company to the public
IP > FV: Issue at premium
IP< FV: Issue at Discount
IP= FV: Issue at Par
Book Building
Is the process of fixing the price by asking the buyers to quote
Is the process of price discovery
Market price
Price at which share are traded in the market

Example: On 1st April 2011 following were the assets and the corresponding sources:
Plant =50,000; Stock =50,000; Shares =20,000; Cash 50,000; Debtors =30,0000; Some
sources: 8% bonds= 30,000; Creditors = 20,000; Capital =20,000.Transactions during the
year:
Issues 5000 shares of 10 at 20
Converted 50% of bonds into shares at 20
Paid off creditors by issuing shares of 10 at 20
Required: Financial statements at the end of the quarter. Market price of the shares on
30th June was 35.
Distribution of dividend
a) Cash dividend: Distribution of dividend in the form of cash. C
Profit reduces and cash reduces
Networth reduces
Book value per share falls
Other things remaining constant, price falls post dividend
b) Bonus Issue/Stock Dividend
Dividend distributed in the form of shares
Converting profit into capital/Capitalization of profits/reserves and
surplus
No cash flows but the number of shares increase
No effect on the book net worth but MP will fall

Issues for discussion_Financing Decisions and FS

2014

Example: Following is the balance sheet of XY ltd.

Balance Sheet as on 1st April 2011
Sources
Assets
Capital (10)
100,000 Stock
Reserves
500,000 Fixed Assets
12% Loans
200,000 Cash
Current Liabilities
50,000
850,000

300,000
350,000
200,000
850,000

Transactions during the year:

Declared stock dividend in the ratio of 1:2
Sold 50% of stock for 250,000 for cash.
Used the entire proceed to buy shares of ABC ltd. The face value of ABC shares
was 5 and market price was 25.
Expenses for the period due but not paid = 50,000
Issued 10% bonds =200,000 on 1st October. Used the entire fund to pay off 12%
loan immediately. Interest on bonds is payable on 31st December.
Received cash dividend: 5000 from ABC ltd.
Required: Financial statements for the year ending 31st March 2010.

Book value per share:

Book value per share = Networth/ number of shares
Example: BV per share related issues
Balance Sheet as on 1st April 2009
Sources
Assets
Capital (10)
100,000 Stock
300,000
Reserves
500,000 Fixed Assets
350,000
12% Loans
200,000 Cash
200,000
Current Liabilities
50,000
850,000
850,000
Show the impact of the following on the book value per share (treat each transactions as
independent)
Issued Rights shares in the ratio of 1:5 at 45
Declared 50% dividend
Issued bonus shares in the ratio of 1:2
Additional Reading:
Chapter 15: Financing by equity: Stice and Stice
Chapter 8: Ramanaebook