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why share issued over the par value? or why issue share by
share premium?
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Answer Posted / ramdoyal meghna
Shares are issued at a premium:
to ensure fairness between old and new shareholders
if 2800 shares issued at £1 then shares would have a nbv of
9800/4800 = £2.04 and original shareholders would have lost £1.46
per share book value
the retained profits have been earned by original shareholders and
issuing the new shares at a premium ensures new shareholders buy
a stake in those earnings
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Occasionally it is said that issuing convertible bonds is better than issuing stock when the firms shares are undervalued. Suppose that the financial manager of Decent Furniture Company does in fact have inside information indicating that the decent stock price is too low. Decent furniture earnings will in fact be higher than investor’s expectations. Suppose further that the inside information cannot be released without giving away a valuable competitive secret. Clearly, selling shares at the present low price would harm Decent’s existing shareholders. Will they also lose if convertible bonds are issued? If they do lose in this case, is the loss more or less than it would be if common stock is issued? Now suppose that investors forecast earnings accurately, but still under value the stock because they overestimate Decent’s actual business risk. Does this change your answer to the questions posed in the preceding paragraph? Explain.
