A clue for Tim

I think everyone else has "got" the island question. Here's an onshore version:

Monday: RR owns 1000 shares in ES Ltd. He agrees to sell them, on Wednesday, to John Boyle for £1,000.

Tuesday: RR receives an unexpected "scrip" issue from ES Ltd - one free share for every 1,000 shares.

Wednesday: John Boyle rings RR's doorbell. How much money should he have in his pocket?

Reply to
Troy Steadman
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Version? Can't see the similarity between the two stories.

But it's easy. JB agreed to pay £1000 so that's how much he should have with him. The question is whether he should get the 1000 shares agreed or the extra free share as well. The answer is that the free shares go to whomever owned the 1000 on Tuesday. Since sale was agreed on Monday, that's when ownership passed, notwithstanding that the debt was settled two days later.

Reply to
Ronald Raygun

Exactly. JB has paid £1,000 for a share that is worth £999. Everything has just got that little bit more expensive, which is exactly what happens on the island.

Reply to
Troy Steadman

I think you are wrong.

The scrip dividend is payable to whomever was on the register of ownership on some date or other. That is certainly not John.

Between this date and the dividend is paid out the shares are traded ex-div and your transaction with John is one such.

Finally, I believe that beneficial ownership of the shares transfers at settlement, not at the point when the bargain is struck.

Neil

Reply to
Neil Jones

I don't need one thanks!! [But perhaps you'd better get one?! ;-) ]

Reply to
Tim

Oops! I misread Ronald and inadvertently corrected him!

Or did I? ES Ltd is a real company and is unquoted :(

Reply to
Troy Steadman

I think the ownership or administrative c*ck-up isn't the issue, the fact remains the company has issued more of its stock thus diluting existing holdings, they have poured water into the whiskey bottle.

Reply to
Aztech

Run this by me again. On Monday the 1000 shares were worth £1000. JB agreed to pay RR £1000 for them. On Tuesday the owner of the

1000 shares received a free gift of an extra share, so there are now 1001 shares. There are now two ways of looking at this.

Either the 1001 shares are still worth only £1000 (and therefore

1000 shares would be worth £999 plus almost a tenth of a penny) because the company hasn't increased in value merely by issuing more shares, and this is the position you are taking.

Or else, and this is the position I favour, the shares are still worth £1 each, and the company has become more valuable by issuing an extra share instead of paying 0.1p dividend per share.

On Tuesday each holder of 1000 shares (which were worth £1000 on Monday) became worth an extra pound by getting the extra share (instead of becoming worth an extra pound by becoming entitled to it as dividend). It seems to me, therefore, that shares on Wednesday are still worth £1 each.

Reply to
Ronald Raygun

So where is that extra £1 in the company's Balance Sheet? How can you increase the value of a business by giving bits of it away for nothing?

:O(

Reply to
Troy Steadman

Here's the double entry:

  1. What are bonus shares?

If authorised by its articles, a company may resolve to use any undistributed profits, or any sum credited to the company's 'share premium account' or 'capital redemption reserve' to finance an issue of wholly or partly paid up 'bonus' shares to the members in proportion to their existing holdings. The shareholders to whom the shares are issued pay nothing. Since the issue may reduce the amount of money available for paying dividends, the term 'bonus' is not always appropriate. The correct term is 'capitalisation of reserves' or 'capitalisation of profits' but the terms 'scrip -' or ' scrip - issue' are also used to describe such shares.

A company can also use a capitalisation of profits to credit partly paid shares with further amounts to make them paid up.

The allotment of bonus shares must be notified to Companies House on Form 88(2). The amount paid or due on each share is 'nil'or '0.00' and the shares are shown as paid up 'otherwise than in cash'.

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Reply to
Troy Steadman

An increase in share capital, balanced by an increase in assets (cash reserves).

You can't. But giving bits of itself away for nothing is what companies do as a matter of routine. They dole out dividends to shareholders "for nothing".

The company earns profit, and this increases the value of the business.

This profit can either be kept in the company, to be invested in its business activitites, which means it stays more valuable for the time being, or it can be dished out as dividend to shareholders, which instantly makes it less valuable, but hopefully not less valuable than it was before the profit was made.

In this instance, the company has gone for a hybrid option. They've kept the money (some of their profits) in the company by not paying out (as much as they might have of) a dividend, through a slick mechanism which resembles "paying" a dividend but then "urging" the shareholders to use the "money" to "buy" extra shares they've just issued.

Reply to
Ronald Raygun

These are difficult subjects to research on the internet because the info isn't there. What we need is a mathematical and logical genius to guide us through it.

Preferably one whose theoretical physics didn't end when Mr Tuvok the Vulcan was born.

...on stardate 38774, Terran year 2264, at the Vulcanis Lunar Colony.

Reply to
Troy Steadman

That'll be Timoteus "Brain the size of a planet" Cantabriensis.

I don't see the need for a great deal of research. The matter seems trivially self-evident.

Reply to
Ronald Raygun

You called.........?

1 Forget the company's balance sheet - that has pitifully little to do with share price. Changes in the latter do not affect the former - it's mostly what is laughingly called "sentiment".

2 Also forget, for a minute, that the "promise" to buy happened a couple of days before the purchase

3 Think "ex-div"... but translate this to "ex-scrip". The shares go ex-scrip on Tuesday.

4 So x,000 worth (at OMV) of shares (being the deemed value of the holding on Monday), is worth the same on Wednesday. But by Wednesday is represented by x,00x scraps of paper. So each scrap of paper (aka cert of one single share) is worth fractionally less (RR has the 64 digit calculator and will tell you fairly accurately).

5 So bloke one turns up with 1,000 cash and leaves with 1,000 scraps of paper.

6 Bloke two is left with 1,000 cash plus one scrap of paper.

7 No different from the shares having gone ex-div (in which case bloke two would have pocketed the div instead of the extra scrap of paper)

8 The catch - if there is one - is that bloke 2 (assuming he has a brain cell) should have known (as bloke one did) from the company's prior announcement that the ex-scrip price (i.e. Wed's closing price, other things being equal) would be 1000/1001ths of Monday's price. ("unexpected" is the only mystery word in your original thingy.) So when he did the deal on Monday (that minute's forgetfulness now being over) the OMV of his (then)

1,000 shares was actually 1001.

9 You've had 8 points of "mathematical and logical genius" - that ought to be enough for now. But just in case....

10 ... and to sum up... On the Monday, bloke two had 1,001 worth of shares. He agreed to swap 1,000 worth of that 1,001 worth of share certs, on Wednesday, for 1,000 cash. And that's what he did.
Reply to
Martin

In message , Ronald Raygun writes

I'm not surprised you like this way of looking at it because it is yhe equivalent of winning a scratchcard, or else sprinkling the share certificate with 'oufle' dust or whatever it was Sooty used to use.

Pleas explain how issuing a 'new' share for no consideration increases the value of a company?

When a shareholder accepts a scrip dividend, the share value remains constant (other influences excepted of course).

Reply to
john boyle

But where did that dosh, sorry I mean, 'cash' come from?

Ahh, now youve changed it! Buying a share with a dividend is completely different to reciving another share for nothing.

Reply to
john boyle

"Share value" - that's ambiguous.

The value of the share holding wil (should) remain constant, but the share price will fall on the day it goes ex-scrip.

Reply to
Martin

Thanks Martin. Obviously if being given "nothing" can fool canny old RR into thinking he's getting "something", then the sentimental argument must be a powerful one. I bet RR loves it when that voucher falls out of the Daily Mail and he realises, once again, that he's a guaranteed winner :)

Just to complete the story:

1) The double entry:

DR Share Premium A/C etc CR Ordinary Share Capital

######## < snip> ###############

...... Yes - but only if it's the "premium pot" (if there be one) which is to be used. It could just as well be from accumulated P+L.

And each of these scenarios pertains only because they are issuing extra fully paid shares, having the same par value, but with the consideration coming from coy's own resources.

Contrast with a simple share split - say 1,001 for 1,000 (however unlikely that sounds...) where there would be no BS adjustments - only EPS and par value etc changes. Plus, of course, the colossal fees and expenses in distributing all those scraps of paper.

The answer to your original qu. would also be different - since the shares traded on Wednesday are no longer the same scraps of paper as those existing on Monday....

Reply to
Martin

Nothing if not modest :-)

Yes, prices of freely-traded shares in quoted companies tend to reflect confidence in the company more than they do the company's intrinsic value, but we were (well, I was) thinking of a private company whose shares are not generally traded. In this case, a share is "really" worth a slice of what the company is worth - its balance sheet value. Though as in any private sale, it's worth what someone is prepared for it.

Why? As I understood the puzzle, there wasn't just a promise, but a deal was done on Monday. They *were* bought. The contract date was Monday, with delivery (or exchange) agreed for Wednesday.

The trouble is that on Monday seller and/or buyer may not have been aware of Tuesday's impending dividend or scrip of 0.1%. So, the

1000 shares may have in a sense been worth £1001 on Monday, unless (as I understand is generally the case when quoted shares go "xd") it was agreed that the seller would retain rights to the div/scrip.

Perhaps. It depends on what was agreed. If bloke 2 contracted to sell his holding and all rights which went with it, then it might be different, ending up with bloke two being left with £1000 and bloke

1 with 1001 scraps of paper.

Indeed.

OK

Beg to differ. He agreed to swap the 1000 shares (not £1000 worth of shares) for £1000 cash. In the absence of any notified xd or xs status, and in the case of a private sale of unlisted shares such status would not generally be notified, I would assume that if ownership passed on Monday, then rights accruing to the holding on Tuesday would belong to the buyer. Had the seller had his brain cell switched on, he should have asked for £1001, but as it is, it's his loss, and the buyer ends up with 1001 shares worth £1001, which he acquired at the knock down bargain price of £1000.

Reply to
Ronald Raygun

Aaarrrggghhh! That cannot be!

The company was intended to be non-quoted so you can make the contract say whatever you like. What you *cannot* have is "1001 shares worth £1001".

If the company was worth £1,000 on Monday pre-scrip how can it be worth anything other than £1,000 on Wednesday post-scrip.

How can you increase the value of something by giving bits of it away for nothing?

Reply to
Troy Steadman

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