Going public and the dividend policy of the company
Plekhanov Russian Economic Academy
The theme of the report:
“Going public and the dividend policy of the company.”
By Timofeeva M. V.
The supervisor: Sidorova E. E.
Moscow 2001.
Contents
Introduction
I. ‘Going Public’ and the Securities Market3
1. ‘Going Public’
2. Types of Shares
3. The Stock Exchange and the Capital Market
4. Procedure for an Issue of Securities
5. Equity Share Futures and Options
II. Dividend Policy and Share Valuation
1. Dividends as a Residual Profit Decision
2. Costs Associated with Dividend Policy
3. Other Arguments Supporting the Relevance of Dividend Policy
4. Practical Factors Affecting Dividend Policy
5. Alternatives to Cash Dividends
Summary
References
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Introduction
In this report we focus on the long-term financing by issuing shares
and dividend policy of the company. We consider the institutional design of
capital market, Stock Market Exchange and Alternative Investment Market;
fundamental theories of paying dividend and factors which influence
Dividend Policy of the companies.
The main objective of this report is to develop a better
understanding of the problems faced by start-up firms seeking capital
financing and paying percentage (dividends). In addition, we try to
identify the consequences of shortcoming and overplus of the dividend
payouts for value of corporation (for value of share) and individuals
(shareholders).
The urgency of this question is obvious, because firms need capital to
finance product-development or growth and must, by a lot of factors
(interest rate, time period and etc), obtain this capital largely in the
form of equity rather than debt. So the issuing of shares and dividend
policy is one of the widest research overseas and I hope Russian economists
don’t be backward in that list.
I. ‘Going Public’ and the Securities Market
1. ‘Going Public’
Most private companies that experience the rapid growth have reached the
stage when existing shareholders’ private resources are exhausted, retained
profit is insufficient to cope with the rate of expansion, and further
borrowing on top of your current amount of loans will probably be resisted
by lenders until you have a more substantial layer of equity capital. One
solution to this financial problem is to retain the services of a financial
intermediary – usually a merchant bank – to find a few private individuals
or financial institution such as an insurance company or an investment
trust that is willing to subscribe more capital. This is known a private
placing. And, of course, there are some advantages and disadvantages of
going public.
Advantages
. access to the capital market and to larger amounts of finance becomes
possible by having shares quoted on the Stock Exchange;
. institutions are more likely to invest on the public listed company, and
additional borrowing becomes possible;
. shareholders will find it easier to sell their shares in the wider
market;
. the company attains a higher financial standing;
. provides an opportunity for public companies to introduce tax-efficient
employee share option scheme.
Disadvantages
. cost of a public flotation of shares are high – as much as 4% - 10% of
the value of the issue;
. because outside shareholders are admitted, some control may be lost over
the business;
. publicly quoted companies are subject to more scrutiny than private;
. the risk of being taken over by purchasing of company’s shares on the
Stock Exchange;
. as the market tends to be influenced more by the short- then long-term
strategy of listed companies, a company committed to a long-term plan may
find its stock market performance disappointing.
The going public company is required:
. minimum issued capital of ?50.000;
. minimum market capitalization of ?500.000;
. 25% of your equity shares available to the public;
. sign a Stock Exchange listing agreement, which binds you to disclose
specified information about your company in future.
2. Types of Shares
There are two main classes of shares are ordinary and preference
Ordinary shares (sometimes called ‘equity’ shares)
Those are the highest risk-takers shares in the company. This implies that
the holder’s claims upon profit – for dividend, and assets – if the company
is liquidated, are deferred to the prior rights of creditors and other
security holders. However, the capital liability of ordinary shareholders
is limited to the amount they have agreed to subscribe on their shares,
therefore they cannot be called upon to meet any further deficiency that
the company may incur. If the ordinary shares are the voting (controlling
shares) but in some companies the significant proportion is held by the
directors and the remainder are widely held by a large number of
shareholders, so the directors may effectively control the company.
Preference shares
They also are the part of the equity ownership, attractive to risk-averse
investors because of their fixed rate of dividend, which normally must be
at a higher level than the rate of interest paid to lenders, because of the
relatively greater risk of non-payment of dividend. Whilst they are part of
the share capital, the holders are not normally entitled to a vote, unless
the terms of issue specified overwise, and even then votes are usually only
exercisable when dividends are in arrears. Preference shareholders have
prior rights to dividend before ordinary shareholders, but it may be
withheld if the directors consider there are insufficient resources to meet
it. There is an implied right to accumulation of dividends if they are
unpaid, unless the shares are stated to be non-cumulative. Payment of such
arrears has priority over future ordinary dividends. And if the company
goes into liquidation, preference shareholders are not entitled to payment
of dividend arrears or of capital before ordinary shareholders, unless
their terms of issue provide otherwise, which they usually do.
Companies have issued three varieties of preferences shares from
time to time, to confer special rights; these are redeemable preferences
shares, participating preferences shares and convertible preferences
shares. Redeemable preferences shares are similar to loan capital in that
they are repayable but they lack the advantage enjoyed by loan interest of
being able to
charge dividend against profit for taxation purposes, participating
preferences shares enjoy the right to further share in the profit beyond
their fixed dividend, normally after the ordinary shareholders have
received up to a state percentage on their capital, convertible preferences
shares give the option to holders to convert their shares into ordinary
shares at the specified price over a specified period of time.
3. The Stock Exchange and the Capital Market
The Capital Market embraces all the activities of financial institution
engaged in:
. the raising of finance for private and public bodies whether situated in
UK or overseas (the primary market);
. trading the securities and other financial instruments created by the
activity above (the secondary market).
The Stock Exchange plays a central role in this international
market. It provides the primary facility fir marketing new issues of shares
and other securities, and also a well-regulated secondary market in shares,
British government and local authority stocks, industrial and commercial
loan stocks and many overseas stocks that are included in its Official
List. Nowadays it called the London Stock Exchange Ltd is an independent
company with the Board of Directors drawn from the Exchange’s executive,
and from the customer and user base.
The main participants on the Stock Exchange are Retail Service
Providers (RSPs) and the stockbrokers. The function of RSPs is to provide a
market in securities, which they have nominated, and to maintain two-way
prices, i.e. lower price at which they are prepared to buy and a higher
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