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SS1: COMMERCE - 3RD TERM

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  1. Associations and Enterprises | Week 1
    3 Topics
  2. Co-operative Societies I | Week 2
    3 Topics
  3. Co-operative Societies II | Week 3
    3 Topics
    |
    2 Quizzes
  4. Public Enterprises | Week 4
    5 Topics
    |
    1 Quiz
  5. Limited Liability Companies | Week 5
    4 Topics
  6. Formation of Limited Liability Companies | Week 6
    1 Topic
  7. Limited Liability Companies III | Week 7
    3 Topics
    |
    3 Quizzes
  8. Trade Associations and Other Enterprises | Week 8
    1 Topic
  9. Chamber of Commerce | Week 9
    1 Topic
  10. Other Forms of Trade Association | Week 10
    1 Topic
    |
    1 Quiz



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1. Shares:

A share is a unit of capital of a company which is allocated to an individual. The sum of all the shares of a company is equal to the authorized capital of a company. One of the ways by which a Public limited liability company gets funds is through issuing of shares to the public.

They are classified into two types:

(a) Ordinary Shares
(b) Preference shares

(a) Ordinary Shares:

There is no fixed rate of interest on these shares. The dividends of the owners of these shares are only paid if that of the preference shareholders has been settled. Also, there are two types of ordinary shares;

(i) Deferred or Founder’s Shares: These are shares belonging to the real owners or founders of the company (promoters). These groups of shareholders have more control of the company and more voting rights in the election of members of the board of directors.

(ii) Preferred Ordinary Shares: They have a fixed rate of dividend payable after all the preference shareholders have been paid. These shares have preference over other classes of ordinary shares.

(b) Preference Shares:

These are shares which receive greater preference over all other classes of shares. It has a fixed rate of dividend and it is payable to the preference shareholders before any other shareholder. At liquidation/winding up, they are settled first from the funds realized from the disposed assets; Though it is made clear that they have no voting rights during elections.

The following are different categories of preference shares;

(i) Cumulative Preference Shares: It has a fixed rate of dividends which is cumulative in nature. If the dividends of a particular year could not be paid due to a non-profit or fund-related problem, it has to be paid in arrears in the following year. A shareholder with cumulative shares has no voting rights.

(ii) Non-cumulative Preference Shares: The same characteristics exist with cumulative preference shareholders except that the dividend cannot be paid in arrears – once it cannot be paid in a year.

(iii) Participating Preference Shares: These shares attract additional dividends after all the ordinary and preference shares have been paid. They share out of the surplus dividends with the promoters/founders.

(iv) Non-Participating Preference Shares: They have only their fixed dividend and nothing more.

(v) Redeemable Preference Shares: It is redeemable because the company can buy the shares back from the holder. They enjoy a fixed rate of dividend and get preference over any other shareholder.

Raising of Capital:

The methods by which a company may use its shares are:

  1. By Prospectus: A prospectus, giving particulars of the company and its business, is published with an application form.
  2. By Offer for Sale: The whole issue of shares is allotted to an issuing house (Merchant bank, finance house) which offers them to the public by means of a document known as, Offer for Sale.
  3. By Placing: This is the method of issuing securities through an intermediary such as a firm of stockbrokers.
  4. By a Right Issue: When a company is established, it may raise further capital by offering the shares concerned to existing members on favourable terms.
  5. By Introduction: The company concerned can apply to the stock exchange for sales of their shares. There will be an offer to the public of a new issue of shares through the stock exchange.

2. Stocks:

It is defined as the bundle of shares. A firm that wishes to have stock converts fully paid shares into stock and each shareholder will receive an amount of stock equivalent to the value of his nominal shares. Shares are issued while stock is not but converted from issued and fully paid shares. Shares are sold and bought in units while stock may be transferred in fractional amounts at prices quoted per stock.

3. Debentures:

This is defined as a loan capital or corporate bond. It is defined again as a certificate issued by a company to an individual, showing that the company is owing the holder. It is a certificate of indebtedness. Companies used it as a mechanism to raise long-term loans from members of the public. The debenture holders are paid interest and are not entitled to the profit of the company. Their interest is paid before dividends are distributed to the shareholders. They are referred to as creditors to the business.

There are two types of debentures:

(a) Mortgaged debentures: These are issued on the company’s fixed assets such as land, building, plant and machinery, etc. if the company fails to pay on maturity, the fixed assets used as security will be sold and the money used to settle the debenture holders.

(b) Floating or Naked Debentures: The company does not use any fixed assets as security but they have to pay their fixed rate of interest whether they make a profit or not.

(c) Redeemable Debentures: These are the debentures the company agrees to redeem on or before the fixed date of repaying the loan.

(d) Irredeemable Debentures: These types of debentures have no fixed date of repayment though they are not irretrievable.

4. Retained Profit:

These are the profits made by the business in the previous year but not distributed as dividends to shareholders but kept by the company for use when in need to run the business.

5. Loan and Overdraft:

The large amount a bank gives out to its customers to meet their obligations in business is called a loan. It is required that the borrower provides collateral to secure the money to be borrowed. Interest is paid on the amount as long as the loan lasts.

Overdraft on the other hand is a situation where a bank allows a customer to withdraw an amount more than the amount he has in his/her account with the bank. Interest is paid only on the amount withdrawn.

6. Trade Credit:

This is a process whereby the seller allows the buyer to buy on credit now and pay later basis.

7. Equipment Leasing:

This is a financial arrangement to finance the purchase of an asset through a finance company or a leasing company. The lease agreement merely creates the right to use an asset for a definite period and at a specified rent. The Lessor may not transfer the title of the assets. Leasing is mostly used if the cost of the equipment is high.

8. Factoring:

This is the process by which a company sells off its debts for cash.

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