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Recently while appraising a loan proposal I noticed that the
company was a newly formed company. While allotting the
capital among the share holders the shares were allotted at
a huge premium. What is the reason for showing a huge premium?
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Answer / ajay
Issuing the shares at premiums is a matter of great
concern. if a share is issued at premium it may reflect
various things like wise.
-Market Requirement of Product or services.
-Quality of prod. or services
-Market Capitalization of pro. & ser.
-board competency
-Brand loyality
etc.
As the rate of above goes higher, the result is high rate
of preimium and vice-e-versa.
considering the same there may a practical scenario, take a
private company for eg.-
-Authorised capital - Rs 50.00 lacs (50,000 equity of Rs.
100 each.)
-Share issued and subscribed 20,000 shares @ Rs.425
(including premium of Rs. 325.to person other than promoters
-Shares issued otherwise than for cash to the Promotrs is
29,000
Shares subscribed by promoters as asubscriber to memorandum
is 1,000 equity.
NOW UNDERSTAND THE CAPITAL AND CONTROLLING STRUCTURE OF THE
CO.-
PROMOTERS INVOLVEMENT IN CAPITAL IN CASH OR OTHERWISE-
EQUITY (in no.)- 30,000 or 60% voting power i.e control in
hand
VALUE PAID FOR THE SHARES- 30.00 LACS (1.00 LACS IN CASH
AND OTHER 29.00 LACS IN KIND)
OTHERS INVOLVEMENT IN CASH-
EQUITY- 20,000 OR 40% voting power.
VALUE PAID FOR THE SHARES-Rs. 85.00 lacs (including premium
amount of Rs. 65.00 lacs)
Let's check the Banks position-
There is Rs. 86.00 lacs in the co.(s) banks account outof
which only Rs. 1.00 lacs is promoters contribution.
This all happend due to TTHE CORPORATE, MANAGEMENT, BRAND,
PRODUCT OR SEVICE STANDARD OF THE CO. WHICH ULTIMATLY
MOTIVATES THE CORPORATES TO ISSUE THE SHARES ART PREMIUM.
| Is This Answer Correct ? | 1 Yes | 0 No |
Answer / reena
The Company might be opening with a huge project and for
that purpose the Company might require huge capital . As
the Company wants to issue less capital (number of shares),
it might be issuing the shares at a premium for raising teh
funds.
| Is This Answer Correct ? | 1 Yes | 2 No |
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Occasionally it is said that issuing convertible bonds is better than issuing stock when the firms shares are undervalued. Suppose that the financial manager of Decent Furniture Company does in fact have inside information indicating that the decent stock price is too low. Decent furniture earnings will in fact be higher than investor’s expectations. Suppose further that the inside information cannot be released without giving away a valuable competitive secret. Clearly, selling shares at the present low price would harm Decent’s existing shareholders. Will they also lose if convertible bonds are issued? If they do lose in this case, is the loss more or less than it would be if common stock is issued? Now suppose that investors forecast earnings accurately, but still under value the stock because they overestimate Decent’s actual business risk. Does this change your answer to the questions posed in the preceding paragraph? Explain.
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