A-level Business notes

Unit 1: What is a business?

Issues in understanding forms of business

ROLE OF SHAREHOLDERS:

 Shareholders literally own a percentage of the business (proportionate to their shareholding)

 EG: A person who has bought 10 shares in a business that issues 10,000 shares owns 1% of the business.
 Shares are only sold to the public on the stock market for public limited companies.
 The shareholder has a right to vote on business decisions at the AGM.
- Many don’t bother attending the AGM as they are only interested in the rewards
 The role of the shareholder for the company is to provide capital to the business through investments.
 Their percentage of ownership determines how much of an influence they get in business decisions.
 i.e. If the majority shareholder has over 50% of the shares – they automatically get full control

SHAREHOLDER REWARDS:

There are two main financial rewards for company shareholders:

 Annual dividend payments
 A rise in the value of shares.

Annual Dividends:
Annual dividends are decided on by the company directors when they know the final figure for profit in the year.
They are not guaranteed payments!
Most companies pay shareholders 50% of the profit.
This is a dividend cover of 2.
A dividend cover of 1 = 100% of the profit.
Calculating dividends:

STEP 1:
Profit / dividend cover
STEP 2:
Answer / number of shares
STEP 3:
Dividend per share figure X number of shares the person owns.

INFLUENCES AND EFFECTS OF SHARE PRICES:

Main influences on share prices are:
 Confidence in the future of the business
 How profitable the business is after tax
 Dividend payments
INFLUENCES AND EFFECTS OF SHARE PRICES:

More popular the shares = Higher the price.

Higher Dividend Shares become Share prices go up

payments more popular (appreciate)

More confidence Shareholders Share prices go up

in the business investing more (appreciate)

EFFECTS OF SHARE PRICES ON BUSINESSES:

Short term:

THERE IS NO IMPACT ON THE BUSINESS IN THE SHORT TERM!

 The share capital of the business is invested permanently by the shareholder.

 If the shareholder wishes to sell their shares, they cannot just demand their money back:
THEY HAVE TO FIND A BUYER FOR THE SHARES

A business selling shares:

When a business expands, it will want to sell more shares / increase its value. The first thing it has to do is a rights
issue.

This is where the business offers the existing shareholders the opportunity to buy more shares at a discounted price
to maintain the percentage share in the business.

Longer term effects of share prices:

HIGH SHARE PRICES = EASY TO RAISE MORE SHARE CAPITAL

LOW SHARE PRICES = HARDER TO RAISE SHARE CAPITAL

Why Businesses prefer raising share capital over loans:

 Don’t have to pay it back (only costs them the dividends)

 No added interest

When share capital is consistently low, a business will have to look at alternative sources of income such as a loan or
overdraft. This will inevitably cost the business more money in the long term.

SEPARATE LEGAL ENTITY:

Separate legal entity means that the business is separate from the individual(s) running it in the eyes of the law.
Therefore:

 Any debts are the responsibility of the business not the owner
 The owner’s personal possessions are not at risk (limited liability)
 If the business makes a faulty product and is sued, the business faces legal action (not the people running it).
 A business can go into liquidation meaning it can’t face legal action and any debt is written off.
LIQUIDATION AND ADMINISTRATION:

Pre-packed administration:

Businesses heading for insolvency (bankrupt) can opt for a pre-packed administration. This is where the debts are
written off to creditors, but the owners still remain in charge.

DISADVANTAGES:

 Suppliers lose everything

 The owners still get to remain in charge of the business.

SHARE CAPITAL:

Dividends can be reduced if the company has a bad year with profits. However, reduced dividends can result in the
shares becoming less popular as people lose confidence in the business – hence reducing the share price.

SHARE CAPITAL VS LOAN CAPITAL:

ORDINARY SHARE CAPITAL BANK LOAN CAPITAL

REYPAYMENTS OF THE CAPITAL:
ANNUAL PAYMENTS:
DILUTION OF CONTROL:
Permanent capital, therefore, it is
never repaid.
Flexible: Dividends are needed in
the long term but can be scrapped
in a difficult year.
Selling more shares to raise extra
capital might threaten the founder’s
control of his/her own business.
Lump-sum repayment at the end of
the period (perhaps 3 years) strains
cash flow.
Inflexible: The bank demands its
interest payments ever month/year
and penalises those who cannot pay
it.
In theory banks have no control (nor
do they take a share of the profit)
but if interest payments aren’t
made on time then the banks can
get heavy-handed.

MARKET CAPITALISATION:

 The value the stock market places on the whole business

 Worked out by multiplying the share price with the number of shares issued.
Share price x number of shares
 IMPORTANCE: Represents a starting point for any company considering making a takeover bid.

EFFECT OF OWNERSHIP ON MISSION, OBJETIVES, DECISIONS, AND PERFORMANCE:

Most large companies are plc so have a large number of outside shareholders – most of these shareholders have
little interest about the business. They JUST WANT RISING DIVIDENDS AND SHARE PRICES.
EFFECT OF OWNERSHIP ON MISSION, OBJECTIVES, DECISIONS, AND PERFORMANCE:

Manager cutting costs by 3% > Manager who cuts greenhouse gases by 3%

KEY TERMS:

KEY WORD DEFINITION

Shareholder Someone who literally owns a percentage of a business (by investing an amount of money
into the business).
Dividend Annual payments to the shareholders that come out of the business’ profits. They can change
depending on how much profit a company makes and how much gets reinvested into the
business.
AGM A yearly meeting in which the company directors invite all shareholders to come to quiz the
board and vote on new resolutions. Legal requirement for PLCs.
Dividend cover Measures how well a firm’s dividends are covered by its profits for the year. Accountants
recommend a figure of 2. (Half of the profits to shareholders).
Rights issue When a company’s value goes up and it wants to sell more shares, it has to give existing
shareholders the right to maintain their percentage by buying more shares at a discounted
price.
Market The value placed on the business by the stock market. It is calculated as:
capitalisation Share price x Number of shares issued.
Capital The money that gets invested into the business by the investors.