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question 1
Tefex Ltd is considering the raising of new long-term finance. It has decided to issue either preference shares or debentures as the ordinary shareholders have only recently been asked to subscribe to a rights issue.
What do you think are the main issues that should be considered when deciding between preference shares and debentures?question 2
Volex began trading as a retailer and in the first year made a loss of £210,000. In the second year of trading it made a trading profit of £250,000 and in the third year of trading it made a trading profit of £140,000. In the third year the company also sold a shop for £400,000 that had originally cost £320,000. It also issued £100,000 ordinary shares at a premium of £1 per share.
What is the maximum dividend the company can issue in each year of trading?i am not a student of acca so need a help
thanks
Q1: You really need to watch the lectures for Paper F9.
The two main things are that interest on debentures gets tax relief (which makes it cheaper), but if the company is unable to pay the interest then they could be forced to liquidate, which is not the case if they are unable to be dividend on the preference shares.Q2: The maximum dividend they are allowed to pay is the profits they have made in both the current year together with previous years.
So in the first year – nothing; in the second year – 40,000 (250,000 – 210,000); in the third year the profit is 80,000 so the maximum dividend is 80,000 (or 120,000 if they had not paid a dividend in the second year).
If this question was set by your teacher, then tell him that the answer for the third year is impossible unless you know how much dividend was paid out in the second year 🙂 )
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