Question a year like interim and final

Question 1

Companies
use funds for achievement of long and short-term objectives and situation
sometimes urge them to issue shares and bonds so that urgent needs of the
business can be met in comfortable manner. Shares are considered as preferred
option for raising funds for the company since under it public, syndicates and
underwriters get opportunity to participate in management affairs of the
company. In contrast to that under bonds issuance and other forms of securities
such option either does not exist or holders of financial instruments have
limited powers. As per Bolton, P. and Freitas, X., 2000 every
organization has its own respective preference level and business needs upon
the basis of which decisions are made as to whether move for shares or bonds.
Mostly it is perceived that organization which offers shares has sound
financial position and issuance of bonds as loan to public or stakeholders is
deemed under challenging and tough scenario for an organization. It is true to
large extent but not always since even well-established multinationals like
Pepsi, Nestle and Microsoft move for these options. Tirolean, J., 1998 strongly
believes that difference between issuance of shares and
bonds by the company demands in depth analysis and sound judgement on part of
business management and decision makers and these can be summed up in the
following manner:

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§  Shares represent ownership of equity
participant into the business of a company while bonds are considered as loan
in the form of long term relationship towards creditors of the company.

§  Shareholders of the company are entitled
to return in the form of dividend on periodic basis and same can also be paid
twice in a year like interim and final dividend. Bond holders are entitled to
fixed amount of interest in accordance with defined time period.

§  Element of risk is always greater in case
of shares in contrast to bonds since future of business also depends upon
market conditions and same are not always under the control of management of an
organization.

§  Shares or stocks are normally controlled
under centralized mechanism by the regulators owing to which shareholders feel
sense of protection while in case of bonds hardly exists element of centralized
trading systems. Owing to such aspect more often people feel hesitation in
entering into such types of agreements but apart from that even many
established organizations rely on issuance of bonds so as to secure their
benefits through availability of liquid cash both in short and long term.

§  Bond holders enjoy sense of lenders to the
organization whereas shareholders are considered as owners of the company. Laws
also define scope of powers for shareholders depending upon percentage of
holding by individuals and corporations and every one can not participate in business
affairs of the company just on the basis of shareholding enjoyed by one and
vice versa.

§  In financial environment both instruments
are considered and titled as securities which fulfill needs and targets of
individuals and corporations in direct and indirect manner.

§  For calculation of yield under bonds
various analytical methods are used like nominal yield, current yield, yield to
maturity and bond convexity. As far as shares are concerned approaches like
Gordon Model, book value, income per share and dividend yield are used.

§  Investors, speculators and investors
belonging to various institutions are normally considered as stakeholders of
bonds whereas market makers, floor brokers and traders are associated with
shares which company issues.

§  Issuance authorities for bonds may exist
in the form of lenders, public sector authorities regulated under rules and
regulations, companies and supranational institutions. In relation to shares
mostly joint stock companies are considered as issuing authorities.

§  Holders of bonds assume title of
bondholders whereas shareholders enjoy title of stockholders apart from
shareholders unless and until they have holding with them.

§  Derivatives which are associated with
bonds include bond option, credit default swap and collateralized debt
obligation whereas for shares these are credit derivative, swaps, options and
hybrid security respectively.

§  There are 12 types of bonds in contrast to
shares since under shares there exist only 4 types.

§  Shareholders enjoy voting powers in the
affairs of the company whereas bond holders do not have any sort of presence in
management affairs of an organization.

§  Mostly in case of yield on bonds federal
govt charges taxation once whereas in case of return on shares owned by the
shareholders of the company taxation at first profits of company and then
individual share of shareholder out of profit is charged which is also referred
to as double taxation.

§  In case of dissolution of a company
external parties like bond holders hold preference in terms of reimbursement of
funds whereas shareholders get their funds in the end after settlement of all
external party’s funds and even paying to government and employees of an
organization. Dissolution of company is technical process and very risky but at
all bond holders mostly remain in safety as regard to their injected financial
resources.

Question 2

Issuance
of shares either at par, premium or discount demands deep analysis in terms of
financial needs and expectations of management in relation to activity which is
going to be initiated. In this regard company may decide to issue shares in any
of the following manner but consideration of various factors like market
conditions, competitor’s behavior and impact of such strategic decision upon
future dynamics of the business need to be taken into consideration. Entire
business structure of the business depends to large extent upon interest of the
equity participants and same can be enhanced owing to offering of best options
to them. Stock splits, bonus shares and right shares are commonly used
terminologies in corporate environment. Business functions of an organization
also urge strategists to adopt decision by keeping in view these options and
these can be explained in comprehensive manner under the following ways:

Stock Split:

Under
such option company has an option to increase its shares into the market but in
the same time reduces share price and in this manner market share of the
company remains unchanged. As per Thomas, W.B., 2003 splitting of stock
leads to change in outstanding stocks available into the market but market
capital as a whole are not affected. There may be certain aims and objectives
associated with splitting of stocks which can be summarized into the following
manner:

§  Investors when feel that share prices are
moving at rapid pace and same is difficult for them to manage in terms of
financial limitations splitting of shares may help in realizing that share
prices are affordable to them owing to smaller fractions while actually share
prices and market capitalization remains the same. When investors are
psychologically fit and reasonable their interest and intention to enjoy long
term relations with the business foster at large.

§  More presence of shareholding with the
shareholders realize them the fact that with greater number of shares available
to them they have ways to derive benefits from stock trading and in case of
rise or fall in the value of share they will easily manage the situation for
collective as well as individual interests.

§  Liquidity position also determines the
fact that organization, individuals or groups have the ability to enjoy more
profitable opportunities and all such are covered under aims of splitting of
shares of a company. Increase in number of outstanding shares automatically
increases liquidity on part of investors who always remain reluctant to enjoy
more and more benefits both internal and external and vice versa.

§  Practice of stock splitting is practiced
mostly by those companies whose shares are traded publicly and such decision to
split the shares is taken by top management which is in most of the cases board
of directors of a company. After splitting of shares of a company automatically
prices of shares are reduced and thus investors feel comfortable in terms of
outstanding shares available with them.

Benefits of stock splitting:

Stock
splitting practice is normally followed by those companies whose share prices
fluctuate with the passage of time at substantial level and such activity also
aims at the protection of interests of small investors. It is also a fact that
market behavior depends upon large number of small investors therefore when
they feel protection ultimately market sustainability and confidence of
shareholders remain at the same place. Various benefits of stock splitting can
be summed up in the following manner:

§  For buyers of shares stock splitting
indicates the fact that prices of shares of a company are increasing and such
aspect encourages low level investors.

§  It helps shareholders to buy shares at
that time when prices of shares are rising and same produces enormous impacts
upon return in the form of dividend which is announced by the company on
periodic basis.

§  Investors feel high level of satisfaction
at the time of sale of shares since prices boost up at the time of sale of
shares.

§  Additional investment is not required in
case of stock splitting therefore investors feel that their cost saving is at
material level.

§  Additional saving of investors leads them
to enjoy profitable opportunities available in the market and those that accrue
in near future.

Bonus Shares:

These
are additional shares which may be offered by the company to existing
shareholders and for that activity no consideration is received from them. Such
distribution is based upon number of shares owned by the company. Chen, C.Y., 2003 is of the view that
company can transfer some of its retained earnings towards shareholders and no
dividend is paid in such deal. Simply it can be considered that reserves of a
company are converted into shares under such concept of bonus shares. Benefits
and demerits of such bonus shares can be summed up in the following manner:

§  Under such agreement investors are not
bound to pay any tax liability to government since no cash is involved in this
deal.

§  Investors who see market in long term
perspective always prefer such deal since they always aim at increasing
shareholding in specified companies as per their preference and selection.

§  Such aspect enhances confidence of
shareholders of the company upon operational and managerial aspects of an
organization.

§  In case of more holding of shares
investors in future earn more profits in the form of dividend.

§  In terms of liquidity such bonus shares at
the spot do not provide benefits to shareholders owing to absence of cash deal.

§  Company does not get any sort of benefits
owing to issuance of bonus shares and thus cost of issuance of bonus shares is
adjusted over the succeeding years.

Right Shares:

Right
shares are those shares which are offered to existing shareholders of the
company for consideration and in contrast to bonus shares same involve cash
which shareholders have to pay to company in proportion to their shareholding
in a company. Mostly companies offer right shares at discounted prices to
shareholders of a company and core purpose behind that is to raise capital for
the company to meet liquidity requirements of the company. Under such offer
company can provide option to shareholders to renounce their right into the
company at any time.

 Since cash deal is involved in right shares
therefore shareholders are made obliged to pay minimum subscription under right
shares issued by the company. Under right shares directors use their
discretionary powers to issue shares towards shareholders of the company
without consulting public or stock exchange. Shareholders mostly enjoy benefits
under right shares since these are offered at discounted prices. Such right
shares can only be issued as per industry practices across the globe up to 25
percent of total value of an organization and not in accordance with the wish
and targets of the company and vice versa.

Question 3

It
is such type of security that can be converted into stated amount related to
equity of the company after specified time period but under life of such
security and not afterwards. All such activity is performed at the will of bond
holder and company cannot take initiative on its own without getting consent of
the bond holder. Kwok,
Y.K., 2004 perceives that since centralized
trading systems for bonds trading do not exist at the most therefore will and
permission of bond holders possesses weightage at substantial levels. It also
acts as an initiative on part of the company to remove misconceptions that
investors may have in their minds regarding liquidity and financial stability
of an organization. There are various reasons for which convertible bonds are
issued by the company which can be summed up in the following manner:

§  It is one of the recommended options for
the company which enjoys sound profile and for which investors and shareholders
have calculated high risk and high return forecast in accordance with their
level of knowledge and expectations. It informs investors that company adopts
most suitable and effective options for their interests and also collective
benefits.

§  Investors always demand security for
investment in any of the company because at least they possess in their minds
that principal invested may remain safe and apart from that they enjoy active
participation in management affairs in case of high times or favorable
circumstances for the company.

§  At initial stage for any organization
investors always keep in mind one thing that they may have to lose which they
have with them. Apart from that there also exist chances of more and more
profits to the company at substantial levels. In case an organization faces
slump or high times at starting levels they may be able to recover at least
their principal amounts in case convertible bonds are opted by them.

§  Convertible bonds are also good options
for both investors and organization when business operations are delivering
enhanced output and both parties are on agreeable terms to each other. It also
allows companies to issue bonds at costs lower than borrowing costs associated
with the issuance. It is one of the common reason why companies prefer to issue
convertible bonds.

Features of convertible bonds:

Features which are
associated with convertible bonds are numerous but most of them which are
prominent in nature can be highlighted in the following manner:

§  These possess coupon payments and are also
considered as legal debt securities which is considered as most reliable as
compared to other options available for the companies. Factors like existing
interest rate into the market and credit worthiness of company also enhance
safety and reliability for investors of the company.

§  Such bonds also offer to existing bond holders
to convert these into ordinary shares of the company in accordance with the
specified prices of the shares of a company.

§  Share prices also determine value of
convertible bonds and cost benefit ratio in accordance with the value of shares
and convertible bonds also urge investors to move for option which allows them
to convert such bonds into ordinary shares. Economic factors and other market
trends determine share prices and value of convertible bonds.

§  Such bonds are traded like shares in the
same manner like when prices are moving up wards shareholders will have more
concern and interest into the market of shares in terms of attractive rates.
Higher yields or returns also urge holders of bonds to keep with them maximum
percentage of bonds so that their trust and cooperation with the organization
may also enhance.

§  Holders of convertible bonds receive fixed
income in accordance with terms and conditions as agreed with them unless and
until these are converted into ordinary shares of the company. Under such
aspect company can also delay dilution of share prices and earning per share
which helps in keeping share in demand for investors and shareholders of the
company.

§  Voting rights are not available for the
convertible bond holders since they receive only fixed income and cannot
participate into the business affairs of the company. Since bond holders are
provided fixed income therefore out of operating activities company always
enjoy much leverage for distribution among equity holders of the company.

§  In case company considers to offer
convertible bonds then apparently it seems that management is losing voting
power but same is temporary owing to flexible option available in terms of
conversion which helps in regaining of actual status associated with equity
participants of an organization.

§  From tax point of view convertible bonds
also hold weight since interest expense which is paid by the company is
considered as deductible expense and thus same helps in the reduction of tax
liability of company on annual basis. Such benefit is although sacrificed when
bonds are converted into ordinary shares of the company.

§  If large part of the company’s equity is
taken over by a particular shareholder than same leads to drastic situation for
the company. Decision making power when is transferred can also lead to losing
original control of equity participant into the affairs of the company. Such
aspect is not critical for organizations having sound footings and presence
across the corners of world with investments in Billions of Dollars but as far
as small companies are concerned for sure situation becomes cumbersome.

§  If company has adopted convertible bonds
options on short term basis then owing to strict limitations and too much
formalities it may have to face unfavorable circumstances. Market conditions
and business performance do not always remain the same and it is also possible
that company may not be able to attract investors in times when it is itself
experiencing hard times owing to various internal and external reasons.

§  It can be a good option for the company if
management of company has sound footed plans and it is going to implement its
policies and strategies in an effective and reliable manner. Business profits,
effective operations, demand for the products and services of the company and
will of management to enhance confidence of investors and other stakeholders
associated with it can also encourage creditors of the company to opt for
convertible bonds option. Factors like existing interest rate into the market and
credit worthiness of company also enhance safety and reliability for investors
of the company. Both equity and convertible bond holders at the same time can
enjoy lucrative benefits in terms of financial performance and sound footings
of the company.