Page 103 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes WN # 3: Debt Equity ratio test:
( in crores)
Particulars Situation I Situation II Situation III
Borrowed Funds 800 1,200 1,500
Minimum equity to be 400 600 750
maintained after buy back in the
ratio 2 : 1
Present equity 720 720 –720
Maximum possible dilution in 320 120 –
equity
Maximum shares that can be 10.67 4 –
bought back @ 30/- per share

Self Assessment

Fill in the blanks:

13. The amount of profit that is distributed to the shareholders in addition to dividend is
called .........................
14. This bonus can be distributed in the form of cash, portly paid up shares or fully paid up
shares to the .........................
15. Bonus is generally not paid in .........................



Case Study Minority Share Buyback

his case study is based on the experience of a business owner who owned 70 percent
of his business. The balance was owned by two individuals, one of whom owned 20
Tpercent and was causing much difficulty. The controlling shareholder wished to
reacquire the shares of the troublesome stockholder, whose interest was valued at $200,000.
But after working through the numbers, the business owner decided that the cost to the
company would be too great. He decided to simply live with the troublesome minority
shareholder.
Corporate stock redemptions are considered by company owners principally for the
following reasons:
1. Peace: To silence a troublesome minority stockholder.
2. Obligation: For example, one of your executives is leaving the company and he or
she has the legal right to require the company to buy the stock he or she purchased
previously under a stock option plan.

3. Mandated Buyout: When a court of law orders the company to buy out a minority
owner’s shares.

4. Investment: Management might cause the company to buy the stock from willing
sellers because they think it will provide a fair return on investment and raise the
value of the shares that remain.
Contd...

96 LOVELY PROFESSIONAL UNIVERSITY