Cost of Capital^59
only meant for the existing shareholders of the company. This means that the general
public cannot subscribe to the issue. The right issue is made to shareholders in a ratio of
their existing holdings. This means that if the shareholder holds 100 shares and
the company want to offer right shares in the ratio of 1:1, the shareholder will get a
right to subscribe to 100 shares. The shareholder can waive his right to subscribe
to these shares and can pass it on or sell it to any other person who is interested
in buying it.
Issuing shares without any consideration to existing shareholders: Bonus
Issue
The first three types discussed issues that raise money. A company can also issue new
shares without any consideration to its existing shareholders. This type of an issue is
called 'bonus issue.' As in the rights issue, the company offers additional shares to its
existing shareholders in a particular ratio of their existing shareholding. How can it do
that when the company has a value attached to each share? The company transfer the
money from reserves & surplus (a part of shareholder's money) to share capital, in
other words, simply a book entry where the total funds available to the company does
not change. The money for the bonus issue of shares comes from 'Reserves & Surplus',
which means that the total shareholders funds remain constant.
Issuing shares as exchange for assets from other entities
When a company takes over the assets of another company or merges that company
with it, it usually issues shares instead of paying the other company or its shareholders.
The consideration paid for acquisition is usually more than the book value of the assets
transferred (Can you explain why?). It could be due to the fact the goodwill of the
assets of the company is also transferred or it could be because of the fact that the
assets are in working condition and add significantly add to the value of the company.
There are several methods of valuation of the future benefits that accrue from the
assets, but these are outside of the purview of this book. These methods are discussed
in detail in any good valuation book.
Issuing Shares at Par or at Premium
The consideration that the company gets by selling its shares does not necessarily have
to be the face value (par value) per share. The company can issue shares 'at par' or 'at
premium'. At par means that the company will charge only the par value for every
share issued. This means that if Cosco issues shares at par, what will be the amount it
will get per share? (Ans: Rs 10). At premium means that the company can charge an
amount per share which is more than the par value per share. This additional amount is
called the share premium and is shown as a separate head in the 'Reserves & Surplus'
category.