8/10/2019 Day 12_ Financing Decisions

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Issues for discussion_Financing Decisions and FS 2014

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Financing Decisions

Equity financing

Debt financing

Accounting issues

Issue of capital Distribution of dividend

Capital reductionCapital:

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 1stApril 2011 following were the assets and the corresponding sources:

Plant =50,000; Stock =50,000; Shares =20,000; Cash 50,000; Debtors =30,0000; Somesources: 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 20Required: 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

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Issues for discussion_Financing Decisions and FS 2014

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Example: Following is the balance sheet of XY ltd.

Balance Sheet as on 1stApril 2011

Sources Assets

Capital (10) 100,000 Stock 300,000

Reserves 500,000 Fixed Assets 350,00012% Loans 200,000 Cash 200,000

Current Liabilities 50,000

850,000 850,000

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 shareswas 5 and market price was 25.

Expenses for the period due but not paid = 50,000

Issued 10% bonds =200,000 on 1

st

October. Used the entire fund to pay off 12%loan immediately. Interest on bonds is payable on 31stDecember.

Received cash dividend: 5000 from ABC ltd.Required: Financial statements for the year ending 31 stMarch 2010.

Book value per share:

Book value per share = Networth/ number of shares

Example: BV per share related issues

Balance Sheet as on 1stApril 2009

Sources AssetsCapital (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

http://www.accounting-ebook.com/main.php?opt=obj&chap=8http://www.accounting-ebook.com/main.php?opt=obj&chap=8http://www.accounting-ebook.com/main.php?opt=obj&chap=8