Theory question 103
Business UnitsCommerce 2 (essay)
(a) State any four advantages of a public limited company.
(b) Explain the following:
(i) Ordinary shares;
(ii) Cumulative preference shares;
(iii) Debenture.
Show the model answer
(a) Any four: can raise large capital from the public; limited liability; continuity (separate legal entity); shares easily transferable on the stock exchange; can employ specialists; economies of large-scale operation; investors protected by regulation; employees can become shareholders.
(b)(i) Ordinary shares (equities) – shares owned by the real owners of the company; holders vote, bear the greatest risk and receive variable dividends after preference shareholders.
(ii) Cumulative preference shares – earn a fixed dividend before ordinary shares; if the dividend is not paid in a bad year, the arrears are carried forward and paid later.
(iii) Debenture – a long-term loan to a company, usually secured on its assets, earning fixed interest whether or not profit is made; holders are creditors, not owners.
Show the difference between owners (shares) and creditors (debentures).