(a) State any four advantages of a public limited company. (b) Explain the following: (I) Ordinary shares (ii) Cumulative preference shares (iii) Debenture.

Answer Details

(a) Four advantages of a public limited company

1. Large capital: It can raise very large amounts of capital by selling shares and debentures to the general public.
2. Limited liability: The liability of each shareholder is limited to the amount unpaid on the shares held, so private property is protected.
3. Continuity/perpetual succession: It has a separate legal existence and continues regardless of the death, insanity or withdrawal of any shareholder.
4. Transferability of shares: Shares are freely transferable through the stock exchange, allowing shareholders to recover their money easily.

(Other valid advantages: benefits from large-scale economies of scale; employs specialists and expert managers; can more easily obtain loans from banks because of its size.)

(b) Explanation of the terms

(i) Ordinary shares: These are the equity or risk-bearing shares of a company. Their holders are the true owners of the company; they carry voting rights but receive dividends only after preference shareholders have been paid, and the dividend varies with the level of profit made. In a bad year they may receive nothing, but in a good year they may earn a high dividend.

(ii) Cumulative preference shares: These are preference shares whose fixed dividend, if not paid in a year of low or no profit, accumulates as arrears and must be paid in full in later profitable years before any dividend is paid to ordinary shareholders. They enjoy a fixed rate of dividend and priority of payment but usually carry no voting rights.

(iii) Debenture: A debenture is a written acknowledgement of a loan made to a company, usually carrying a fixed rate of interest. A debenture holder is a creditor of the company (not an owner), receives interest whether or not profit is made, and ranks ahead of shareholders for repayment if the company is wound up. It may be secured (mortgage debenture) or unsecured (naked debenture).