4. Features of equity shares
1.Right to income :
The equity investors have residual
claim to the income of company. The income
left after satisfying the claims of all other investors
belongs to equity shareholder. This income is
simply equal to profit after tax minus preference
shares dividend. The income of equity
shareholders may be retained by the firm or paid
out as dividends.
Equity earnings which are retained in
firm tend to increase market value of equity shares
& earnings distributed as dividend provide
current income to equity shareholders.
Equity shares
5. Equity shareholders are owners of the
firm. So they can elect the board of directors
& have right to vote on every resolution
passed before the company. The board of
directors selects the management &
management controls the operations of firm.
Hence, equity shareholders indirectly control
the operation of firm.
2. Right to control
6. The pre- emptive right enables existing
shareholders to maintain their proportional
ownership by purchasing the additional equity
shares issued by company. According to law,
existing shareholders have first priority to
purchase additional shares on pro rata basis
before the others. Ex. if company has 10,00,000
outstanding shares of equity & proposes to issue
3,00,000 additional equity shares, an equity
shareholder owing 100 shares has the first right
to purchase 30 of 3,00,000 new shares before
those are offered to anyone else
3.Pre-emptive right
7. Equity shareholders have a residual
claim over the assts of the firm in the event of
liquidation. Claims of all others- debenture
holders, secured lenders, unsecured lenders,
other creditors, & preference shareholders –
are prior to the claim of equity shareholders.
4.Right in liquidation
8. Evaluations from the view point of Company:
Advantages :
1. Permanent capital :
it represents permanent capital. Hence there is no
liability for repayment.
2. No obligation to pay dividend :
equity shares impose no obligation on the
company to pay a fixed dividend to the equity
shareholders. They get dividend if adequate profits are
available.
3. No charge on property :
the company is able to procure capital
without creating charges on its property, which
remain free & can be utilized when additional funds
are required by the company.
Evaluation
9. 4.Wide scope of marketability :
equity shares are lower denominations, hence they can be
purchased by persons of limited income also. So there is a wide
scope of marketability of equity shares.
5.High creditworthiness :
The equity capital increases the company’s financial base &
thus it’s borrowing limit increase. Lenders generally lend in proportion
to the company’s equity capital. By issuing Equity shares, the
company increases its financial capability. It can borrow when it needs
additional funds.
6.High premium :
the company can easily sell equity shares on premium in
times of boom. Even in such circumstances , people are most eager
to buy equity shares. Hence company can easily & quickly raise fixed
capital through equity shares.
10. 1. Cost of equity :
cost of equity is generally highest. The rate of
return required by equity shareholders is generally
higher than rate of return required by other investors.
2. Floatation cost :
floatation cost means cost of issuing equity
shares, which is higher than cost of issuing other types of
securities. Underwriting commission , brokerage costs &
other issue expenses are higher for equity capital.
3. Interference in management :
equity shareholders have voting rights. Hence
there may be interference in existing pattern of
management.
Disadvantages
11. 4. Speculation :
there are the higher chances of speculation
because it is traded in stock market.
5. Dividend is not tax deductible :
equity share dividend is not tax deductible payment
6. Dilution of control :
Sale of Equity shares to outsiders may result in
dilution of control of existing shareholders
12. Advantages
1.Higher Dividend :
The equity shareholders earn more by way of
dividend compared to other alternatives during
prosperous time.
2.Voting Right :
Equity shares holders have a voting right.
Shareholders can participate in the Management of
company through voting right. They can vote for
many important matters such as election of
director& auditor, approval of dividend
recommended by director.
Evaluations from the view point of
Shareholders:
13. 3.Capital Appreciation :
Equity shareholders get the benefit of capital
appreciation, when boom condition prevail.
4.Right Shares :
An Existing company has to offer the new issue
of its shares to existing shareholders as right shares
on priority basis.
5.Good Liquidity Position :
The liquidity position of Equity shareholders is
improved because these shares are freely traded in all
national level stock exchanges.
14. 1.Uncertain Return :
no fixed rate of dividend is to be paid to
equity shareholders. Only directors have the authority
to decide whether to declare dividend or not.
2.Residual Claim On Income As Well As Assets :
equity shareholders have last priority on income as
well as assets after satisfying claims of others-- debenture
holders, secured lenders, unsecured lenders, other creditors,
& preference shareholders.
3.Low Market Value :
when low dividends are declared or postpone
the dividend , the market value of equity shares
decline & investors suffer a capital loss.
Disadvantages
15. 4.Risky Investment :
equity prices tend to fluctuate widely, so making
equity investment risky.
5.Higher Speculation :
During boom phase of stock market, Equity shares
may encourage too much speculation.
6.Dilution of Control :
The issue of new Equity shares may dilute the
ownership & control of existing shareholders while a
preemptive right to retain their proportionate ownership;
they may not have funds to invest in additional shares.
16. • Authorized, issued, subscribed & paid-up
capital :
the amount of capital that a company
can potentially issue, as per its memorandum,
represents the authorized capital. The amount
offered by company to investors is called
issued capital. The part of issued capital
issued capital which has been subscribed by
investors represents subscribed capital. The
actual amount paid up by investors is called
paid –up capital.
Important terms
17. • Per value, Issue price, Book value & Market value :
The per value of equity share is the value
stated in the memorandum & written on share scrip.
It is also called as face value. It is generally Rs. 10
or rs.100. infrequently, par value like re.1, Rs. 2,
Rs.5 , Rs. 50 are available.
• The issue price is the price at which equity share is issued.
When issue price exceeds par value, difference is referred to
as the share premium.
18. • The book value of equity share =
Paid up equity capital + reserve & surplus
No. of outstanding equity shares
• The market value is the price at which it is traded in
the stock market.
