Section 1, Chapter 3

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  • Chapter 3: issues in understanding forms of business
    • the role of shareholders
      • shareholders own their own share of the business, proportionate to their shareholding
      • the role of the shareholder is to provide the capital to get the business going and to keep it growing
        • the point of share ownership is the degree of influence it gives, plus the rewards it provides
      • each year a public limited company must invite all its shareholders to an annual general meeting (AGM)
        • the shareholders have the right to question the board of directors on any aspect of the company's performance or places
    • shareholder rewards
      • two main financial rewards for company shareholders
        • annual divided payments
          • are decided upon by the company directors when they know the final figure for the profit for the year
          • the dividends received are in proportion to shareholdings
        • a rise in value of the shares
    • what influences the price of shares?
      • the value investors place on a shareholder depends on the profit after tax the company makes multiplied by the value investors placed on those earnings
      • if investors have a great deal of confidence about the future of the business they'll pay a high multiple
    • the significant of share price changes
      • short term
        • no actual impact on a business of a change in its share price
          • the share capital of the business was invested permenately by shareholders so if they were to lose confidence they would have to find a buyer for their shares
      • long term
        • the share price can matter, if the share price is high, it makes it relatively cheap and easy to obtain more share capital
          • a business can carry out a rights issue which gives existing shareholders the right to buy more shares at a discount to the market value
          • if the share price is low and remains low, the company is likely to be able to raise any extra share capital, which makes it harder to raise loan capital
    • issues with different forms of business
      • unlimited and limited liability
        • the process of incorporation means that the company is treated as a separate legal entity from those who own the business
          • if the business sells a customer a faulty item, the customer can sue the business but not the owners, this is important if the business goes into liquidation
        • UK firms can arrange fo a 'pre-pack administration' , this allows business'sownenrs to write off their  debts to creditors, yet remain in control of the business
          • however, the suppliers can lose everything
      • ordinary share capital
        • the company issues the shares in exchange for the investor's capital. the shareholders can expect an annual dividend as a reward for their investment, but id the year wasn't good for trading they can drop dividends
      • market capitalisation
        • the value the stock market places on the whole business by multiplying the share price by the number of shares issued the importance of the figure is that it represents the starting point for any company considering making a takeover bid
      • dividends
        • these are the annual reward to the shareholders for their investment in the business, they represent an income to shareholders
        • given that most companies grow over time, the dividends they declare tend to grow as well
          • dividends tend to rise over time, giving a rising income as the years go by, rising income is especially attractive for retired people who worry about the real value of their pensions
    • effects of ownership, mission, objectives, decisions and performance
      • most large companies are plus and therefore have a large number of outside shareholders who may care little about the business
      • this can lead to a fundamental problem: whatever the mission statement says, staff will soon learn the real priorities of senior management


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