Page 56 - DLIS104_MANAGEMENT OF LIBRARIES AND INFORMATION CENTRES

Unit 8: Library Finance

New shares issues Notes

A company seeking to obtain additional equity funds may be:
an unquoted company wishing to obtain a Stock Exchange quotation
an unquoted company wishing to issue new shares, but without obtaining a Stock Ex-
change quotation
a company which is already listed on the Stock Exchange wishing to issue additional new
shares.
The methods by which an unquoted company can obtain a quotation on the stock market are:
an offer for sale
a prospectus issue
a placing
an introduction.

Offers for sale

An offer for sale is a means of selling the shares of a company to the public.
An unquoted company may issue shares, and then sell them on the Stock Exchange, to raise
cash for the company. All the shares in the company, not just the new ones, would then
become marketable.
Shareholders in an unquoted company may sell some of their existing shares to the general
public. When this occurs, the company is not raising any new funds, but just providing a
wider market for its existing shares (all of which would become marketable), and giving
existing shareholders the chance to cash in some or all of their investment in their com-
pany.

Caution When companies ‘go public’ for the first time, a ‘large’ issue will probably take the
form of an offer for sale. A smaller issue is more likely to be a placing, since the
amount to be raised can be obtained more cheaply if the issuing house or other
sponsoring firm approaches selected institutional investors privately.

Rights issues

A rights issue provides a way of raising new share capital by means of an offer to existing shareholders,
inviting them to subscribe cash for new shares in proportion to their existing holdings. For example,
a rights issue on a one-for-four basis at 280c per share would mean that a company is inviting its
existing shareholders to subscribe for one new share for every four shares they hold, at a price of 280c
per new share. A company making a rights issue must set a price which is low enough to secure the
acceptance of shareholders, who are being asked to provide extra funds, but not too low, so as to
avoid excessive dilution of the earnings per share.

Preference shares

Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary
shareholders. As with ordinary shares a preference dividend can only be paid if sufficient
distributable profits are available, although with ‘cumulative’ preference shares the right to an
unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference
shares must be paid before any dividend is paid to the ordinary shareholders.
From the company’s point of view, preference shares are advantageous in that:
Dividends do not have to be paid in a year in which profits are poor, while this is not the
case with interest payments on long term debt (loans or debentures).
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