1.0 The difference between issuing shares
and bonds as financial instruments as means of acquiring funds for a company.
Shares: According to Paramasiva & Subramimanian (2009), The
ownership securities also known as capital stock, is regularly called as
shares. Shares are the most Universal strategy for raising finance for the
business concern, they also represent an ownership interest in an organization.
Shares consist with four types of securities which are: equity shares,
preference shares, no par stock and deferred shares. While Bonds: Are a type
of debt or long-term promissory note, issued by a borrower, promising to its
holder a foreordained and fixed amount of interest every year and repayment of
principal at maturity or are a type of long-term obligation or in which the
issuing organization guarantees to pay the principal amount on a particular
date. The five types of bond are: debentures, subordinated debentures, mortgage
bonds, Eurobonds and convertible bonds.
1.2 Importance of a company issuing
shares and bonds.
to Paramasiva & Subramimanian (2009), it is important for companies to issue shares because they are long-term
sources of finance meaning they add more capital or finances to the company.
Secondly, they play a major role in deciding the capital structure of the
company. Thirdly, repayment of finance or funds is very limited which means it
helps the company save when it comes to its finances and finally, it is a
noteworthy piece or major part of the organization’s aggregate capitalization.
However, it is also important for companies to issue bonds because, a few bonds represent unsecured commitments of
the organization and a debenture is an unsecured bond. All open bonds issued by
industrial and finance are debentures (Ross, Westerfield & Jaffe, 1999).
Advantages and disadvantages of issuing shares and bonds to a company
reason why companies issue shares is that at some point every company needs to
raise money. To do this, companies raise it by selling part of the company,
which is known as issuing stock (Mohamad, Ahmed & Badri, 2017) or companies
can either borrow it by taking a loan from the bank or somebody which is also
known as issuing bonds (Mili & Abid, 2016). Bond are subject to risk such as liquidity risk meaning unable to meet short term
financial demands, credit risk, interest rate risk and reinvestment risk while
shares have more risk than bonds. Therefore, the difference of companies
issuing shares and bonds is that shares are more volatile while bonds are more
stable and shares form part of the equity while bonds are part of debt.
2.0 Discuss what are stock splits, bonus
issues and right issues
Hackard & Tse (2010), corporations issuing stocks and investment
organizations exchanging stocks confront the test of giving securities that can
be bought by a wide assortment of investors who wish to expand their investment
risk. Organizations have used stock splits of shares whose cost is increasing
or expanding to pull in a more extensive base of investors. Stock splits have
been regular for independently recorded securities, although recently have splits
happened in the exchange-trade-fund (ETF) market.
to Menendez & Anson (2003), Stock splits represent the book entries that
don’t build the organization’s income because, in spite of the fact that their
cost of apparent, for example, regulatory, printing and lawful or legal expenses,
and in addition transaction costs, their advantages for shareholders or investors
are not the slightest bit apparent. Traditional economic clarifications for
stock splits include both their utilization as a signal of the company’s good
future prospects, their utilization as a way to return share price to some
ideal exchanging range, in this manner enhancing investors liquidity, at least
for small investors. As of now, the third reason has been proposed, in particular
the utilization of stock splits by managers to modify the company’s possession
structure by expanding the quantity of individual investors and diminishing
institutional entrenchment speculation.
For example: an
organization which has 100 issued shares estimated at $100 per share, has a
market capitalization of $10,000 = 100 × $100. If the organization splits its
stock 2-for-1, there are currently 200 shares of stock and every investor holds
twice the same number of shares. The price of each share is adjusted to $50 = $10,000/200.
Reasons why stock splits are needed
in a company:
to Zhu & Xia (2011), a company’s top managerial staff decides to split its
stock with an end goal to lessen its share price. All things considered, high
costs can act as an impediment to planned purchasers, especially the smaller ones.
A stock split will lessen an organization’s share price to a level that is
ideally observed as more moderate as more affordable to investors. It is also
believed that managers may use stock splits to purposely change the shareholder’s
structure or arrangement to decrease potential checking or monitoring by the
large shareholders and pass on private information (Lee, 2008). It is believed that
notwithstanding the signaling., optional price range and valuation give the
reasons regarding why the managers attempt an apparently corrective occasion,
for example, stock splits.
if the prices of the stocks are too low the company might face difficulties to
sale the shares because a low share price may indicate that it is undervalued
stock or it might also be considered as warning for investors not to purchase
the stock as the price of the shares continues to go down, so the company will
now introduce the reversed stock split which is the opposite of stock splits. A
reverse stock split is a trade of a specific number of old shares for a lesser
number of new shares that should make the stock price increment relatively.
Reverse stock splits enable organizations to rapidly raise their stock price up
in an endeavor to keep their trade posting and increment liquidity (Neuhauser
& Thompson, 2014).
to Guo, Hou & Yang, (2006), state that bonus
issues also scrip issue or capitalization issue called bonus shares which are extra
or additional shares given to the existing shareholders with no extra cost, in
light of the quantity of shares that the shareholder already owns. These are
organization’s aggregated profit which are not given out as dividend, but
rather are changed over into free shares, in other words, the company might
decide that for every ten shares a shareholder has they will be rewarded one
more bonus share. In addition to that, bonus issues are generally reported or
announced by the organization with a record date, the date which is considered
for the bonus issues. Every investor holding the shares on the record date are
qualified for bonus shares. After the declaration of the reward however before
the record date, the shares are alluded to as cum-bonus. After the record date,
when the bonus has been given impact, the shares will now become ex-bonus.
issues transfer from the organization’s reserves into paid-up share capital is
along these lines known as capitalization of reserves where an expansion in
investors’ value is counterbalanced by a fall in the capital reserves or retained
income. Since no new finances are brought up in a bonus issue, the organization’s
total assets or equity as estimated by the share capital and reserves stays
unaltered. In a bonus issue, the nominal value also called face or par value of
the organization’s shares does not change (Machiraju, 2000).
the point when an organization offers 1:5 bonus share, it implies an investor
will get 1 free offer for 5 shares, so you can also say if a shareholder owns100
shares and when it is time for the company to issue bonus shares the investors
shares will increase to 120 shares.
Reasons why companies use bonus
to Malhotra, Thenmozhi, & Kumar (2013), firstly, is to offer existing
investors part of their individual advantages or profit in the undistributed
benefits held in the organization as shares rather than money circulation in
order to monitor money for business operations or developments. Secondly, its to
advance more dynamic exchanging or trade of the organization’s shares in the stock
market system through lessening the market price per share inside a more
sensible range because of the augmented share capital base so that they are within
the compass of the retail shareholders everywhere, who may some way or another
give the stock a miss because of its underlying high price levels. Lastly, to
fill in as a strong sign to the stock market of the organization’s monetary
quality through its proceeded with capacity to benefit its bigger equity base
and future development prospects, in this way potentially improving the credit
standing and henceforth acquiring limit of the organization (Guo, Hou & Yang,
summaries the reasons why companies use bonus issues it’s because bonus shares
energize retail support and increment their equity base. At the point when the
price per share of an organization is high, it ends up being noticeably hard
for new investors to purchase shares of that specific organization. Increment
in the quantity of shares lessens the price per share. Be that as it may, the
general capital remains the same regardless of whether bonus shares are
proclaimed. Organization typically gives bonus shares as a substitute of dividend
payouts (Marriott, Edwards & Mellett, 2008).
According to Paramasivan
& Subramanian (2009), right issues include offering securities in the
essential market by issuing rights to the current investors or shareholders. At
the point when an organization issues extra equity capital, it must be offered
in the principal example to the current investors on pro-rata or proportional
basis. This is required under area 81 of the Company Act 1956. The investors however,
may by an uncommon determination resolution to refuse or not taking the offer completely,
to empower an organization to issue extra cash-flow to the public.
However, rights issues
must be kept open for no less than 30 days and not over 60 days (Malhotra,
Thenmozhi & Kumar, 2013), an issuer providing the rights issue should
declare a record date to determine if the investors are qualified to apply for
indicated securities in the proposed rights issue. Then the issuer should not
pull back the rights issue after declaration of the record date. If the if the isuuer
pulls back the rights issue after reporting the record date, it might not
influence an application for posting of any of its predetermined securities on
any perceived stock exchange for a year from the record to date, provided that
the issuer may look for posting of its equity shares distributed according to
change or trade of convertible securities issued before the declaration of the
record date, on the perceived stock exchange where its securities are recorded
(Bates, Conceicao, Norman, Pudge & Sarch, 2008).
If Ben owns 10 shares
of the company which are currently valued at $100 per share and the company is
extending for a 1:2 rights issue allowing Ben to buy 5 more shares at a belowed
or discounted market price of $70 per share. This is considered a good idea
compared to the original market price of $100 per share. However, the rights
issue has also increased the number of the company’s shares in the market
leading to a dilution in each share value. Therefor, the value of Ben’s 15
shares will be $90 per share after he exercises his rights.
= (10 * $100)
+ (5*$70) / (10+5)
= $1,000 + $350 / 15
= $1350 / 15
Reasons why companies use rights issues:
According to Lim
(2009), rights issue is a path for organizations to
raise capital. Capital is raised when shareholders pay for the new shares that
are being issued. Organizations can utilize the raised capital to gain
resources or assets, make an assume control, repay debts or spare themselves
from bankruptcies. An organization can raise capital by different routes, for
example, getting from banks or issuing bonds. Although there can be times where
the banks might be hesitant to loan, particularly if the organization isn’t
doing great Rights issue will likewise make huge changes the organization’s
income. Furthermore, high financing cost brought about by loans of bonds may
likewise constrain an organization to raise capital through rights issue offering.
Capital raised through rights issue can additionally strengthen the
organization’s asset report or balance sheet and enable it to seek after vital
open doors in the core markets. However, rights issue will cause an
organization’s net profit to spread over a larger quantity of shares. Therefore,
an organization’s income for every share will diminish as profit allocated to
every ordinary share a shareholder has invested will be weakened.
3.0 Convertible Bonds:
According to Choudhry
(2004), A convertible bond is a corporate security that gives the bondholder
the privilege without forcing a commitment to convert or change over the bond
into another security under determined conditions, normally the ordinary shares
of the issuing organization. The motivation to convert is exclusively at the
carefulness of the bondholder because once the bond has been converted into ordinary
shares, the shares cannot be traded or converted back into bonds. In other
words, convertible bonds they are additionally converted to preferred shares
which are basically preference shares that are convertible into ordinary shares
and still under terms determined at the time of issue. Convertible bonds can
likewise be characterized as obligation or debt securities that can be changed
over into a company’s stock at a pre-determined cost.