(a) State any four advantages of a public limited company.
(b) Explain the following:
(I) Ordinary shares (ii) Cumulative preference shares (iii) Debenture.
Explanation
(a) The advantages of limited liability company:
(i) It has the ability to raise large capital through the issue of shares and debentures.
(ii) The shareholders enjoy limited liability
(iii) There is continuity of existence/legal entity.
(iv) It enjoys large scale operation
(v) It can employ experts/specialists.
(vi) Investors are protected through the rules and regulations issued by the security and exchange commission.
(vii). Employees can become co-owner through the acquisition of shares.
(viii) Easy transferability of shares by shareholders.
(b)(i) Ordinary Shares : Ordinary shares are parts of the capital of a limited liability company held by the owners of the company. They are known as equities. The holders are the risk bearers of the company. The dividend attached to ordinary shares depends upon the amount of dividend declared by the board of directors. They rank last in the payments of dividend. The holders enjoy all the rights and privileges of the company.Vote and be voted for.
(ii) Cumulative Preference Share: The holders of cumulative preference are not owners of the company because their shares are redeemable. The holders enjoy fixed rate of dividend which must be paid before the ordinary shareholders are paid any dividend. Cumulative shares preference entitle the holders to arrears of dividends if insufficient profits were made that the company could not pay dividend. The holders do not enjoy all the rights and privileges of the company.
(iii) Debenture: These are long term loan capital given under a company's seal. Debentures attract fixed rate of interest which must be paid whether the company makes profit or not. Debenture may be secured on the assets of the company (mortgage debenture). The debenture holders are not members of the company but creditors to the company. They do not enjoy any right and privileges of the company.