Chapter 13, Problem P13.41BPGB

To determine

Concept Introduction:

Forms of organizational structures of Businesses

• Several options exist for creation of new entities such as partnership firms, proprietorship firms, corporations etc. Each has its’ own distinct advantages and demerits and appropriateness of the organization structure, depends on the objectives of the founders.

• For instance, when the objective is to form a joint venture for a short duration, a partnership firm is the most appropriate since it allows for quick distribution of profits and losses and also contains provisions for dissolution.

• Similarly, opting for the corporate structure of organization of business comes with its own set of merits and demerits. Some of the advantages include perpetual continuity, separation of ownership from management, distinction of personal and business assets and liabilities etc.

Classes of shares:

• Shares provide partial ownership or a “share” of a corporation. There are two primary classes of shares – Equity Shares and Preference Shares.

• Equity shares are the class of shares which carry voting rights and equity share holders are the true owners of the company as in the event of dissolution, equity shareholders get last preference in clearing the amounts invested and there is no guarantee of profits / dividend on an annual basis.

• Preference shares are the class of shares which do not carry voting rights and in the event of dissolution, preference shareholders get first preference in clearing the amounts invested and there is usually guarantee of profits / dividend on an annual basis. Convertible Preference shares are preference shares that carry the option to be converted into equity shares after certain duration.

Calculation of Shares to be issued

• Shares provide partial ownership or a “share” of a corporation. There are two primary classes of shares – Equity Shares and Preference Shares.

• Equity shares are the class of shares which carry voting rights and equity share holders are the true owners of the company as in the event of dissolution, equity shareholders get last preference in clearing the amounts invested and there is no guarantee of profits / dividend on an annual basis.

• In the event that the capital to be issued is decided, the number of shares to be issued is calculated as the capital to be raised divided by the issue price of the equity shares.

$\text{Shares to be issued = Capital to be raised / Issue price per share}$

Requirement 1

Main advantage of corporate structure of ownership

To determine

Requirement 2

Which class of shares should be issued.

To determine

Requirement 3

To Calculate:

Number of shares to be issued.