With the use of examples, distinguish between: Authorised and issued share capital Participating preference shares and cumulative preference shares Preference dividend and ordinary dividend
Question 1
With the use of examples, distinguish between:
- Authorised and issued share capital
- Participating
preference shares and cumulative preference shares
- Preference dividend and ordinary dividend
Authorized share capital and Issued share capital:
Authorized share capital is the total number of shares a company is authorized to issue by the articles of the company.
It is the maximum number of shares can be issued and can be only increased by the approval of shareholders.
Issued share capital is the portion of the authorized share capital which has been issued by company to the investors.
Example: Company A has Authorized capital of 100,000 shares and out of it has issued 80,000 shares to promoters and outside investors.
Participating preference shares and Cumulative preference shares:
Participating preference shares entitle the holders that shares for a additional dividend along the fixed dividend so that they are paid equally with common shareholders when there is a rise in profits of company for certain years.
Cumulative preference shares entitle the holders of the shares to receive unpaid dividend of earlier years due to insufficient profits before paying any dividends to common shareholders in the current year.
Example: The company has Net profit of $100,000,preference shares are 10,000 shares of $10 each.Preference dividend in arrears is $20,000.Preference shareholders along with their 10% fixed rate are paid $3 per share as participating right( Arrears of preference dividend is to be paid before paying any dividend to common shareholders). So total preference dividend is $10,000 (current year) + $20,000 (arrears) + $30,000 (additional dividend).
The remaining $40,000 is paid to common shareholders proportionately as per shareholding.
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