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Sir i have a question that i need some help on.
A company has in issue two classes of shares: A shares & B shares. A shares are correctly classified as equity. Two million B shares of nominal value of $1 are in issue. The B shares are redeemable in two years time. The company has a choice as to the method of redemption of the B shares. It may either redeem the B shares for cash at their nominal value or it may issue one million “A” shares in settlement. A shares are currently valued at $10 per share and the lowest price for the A shares has been $5.
Is this debt or equity?
Kindly explain reason sir.
Hi,
What do you think they should be, and why? If you at least try to work it out then I’ll assist.
Thanks
I would say redeem the “B” share at the $1 nominal value since this is much economically feasible from the company’s perspective when compared to issuing the “A” shares. In this case, since i have a contractual obligation to deliver the cash this will be classified as a “financial liability”.
My rationale:
I am thinking in the sense that i prefer to pay one dollar per share than to give away a portion of my company which has a current & historic proof of being valued at above $1 per share.This is my line of thought sir.
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