Shares issued at a premium refer to shares sold by a company at a price higher than their par value. The premium represents the difference between the issue price and the par value and is generally credited to a share premium account. This article delves into the historical context, types/categories, key events, detailed explanations, importance, applicability, examples, considerations, and related terms associated with shares issued at a premium.
Historical Context
The concept of issuing shares at a premium has been a fundamental aspect of corporate finance since the early 20th century. Companies have used this method to raise capital without diluting the value of their existing shares. Historically, during times of economic growth and expansion, firms often issued shares at a premium to leverage market conditions and investor confidence.
Types/Categories
- Equity Shares Issued at a Premium: These are common shares issued at a higher price than their nominal value.
- Preference Shares Issued at a Premium: Preference shares that provide preferential rights in dividends and capital, issued at a premium.
Key Events
- Initial Public Offerings (IPOs): During an IPO, companies often issue shares at a premium to reflect their market value rather than their book value.
- Rights Issues: Companies may issue additional shares to existing shareholders at a premium to raise more capital.
Detailed Explanations
Calculation
If a share’s par value is $10 and it is issued at $15, the premium is $5 per share. This premium is transferred to the share premium account, enhancing the company’s reserves.
Accounting Treatment
The accounting entry for a share issued at a premium:
- Debit: Cash/Bank account with the issue price.
- Credit: Share Capital account with the par value.
- Credit: Share Premium account with the premium amount.
Example
Company XYZ issues 1,000 shares with a par value of $10 at an issue price of $15. The journal entries would be:
- Debit: Cash/Bank $15,000
- Credit: Share Capital $10,000
- Credit: Share Premium $5,000
Importance
- Capital Generation: Issuing shares at a premium generates additional capital without increasing the nominal share capital.
- Strengthened Financial Position: The share premium account can be used for specific purposes like writing off preliminary expenses or issuing bonus shares.
- Investor Confidence: Shares issued at a premium often indicate strong investor confidence in the company’s prospects.
Applicability
Companies across various sectors employ the practice of issuing shares at a premium, especially those with strong market positions or high growth potential.
Examples
- Tech Companies: Often issue shares at a premium during IPOs due to high investor demand.
- Banks: Issue additional equity at a premium to meet regulatory capital requirements.
Considerations
- Regulatory Compliance: Companies must comply with legal provisions regarding the utilization of share premium accounts.
- Market Conditions: Favorable market conditions can significantly impact the ability to issue shares at a premium.
- Dilution: Share issuance at a premium, while beneficial, can still dilute ownership percentages.
Related Terms with Definitions
- Par Value: The nominal value of a share as stated in the corporate charter.
- Share Premium Account: An equity account that holds the excess amount received over the par value.
- Equity Financing: Raising capital through the sale of shares.
Comparisons
- Shares Issued at Discount: Contrary to premium shares, shares issued at a discount are sold below their par value, which is less common and often regulated.
- Face Value vs. Market Value: Face value is the nominal price, whereas market value reflects the current trading price, which can be higher due to a premium.
Interesting Facts
- Premium share issuance is more common in bullish markets when investor confidence is high.
- The share premium account is considered part of the company’s equity but can only be used for certain specified purposes under company law.
Inspirational Stories
Tesla’s IPO (2010): Tesla Motors went public in 2010, issuing shares at a premium due to high anticipation of its electric vehicles, raising significant capital that spurred its growth into one of the most valuable car manufacturers today.
Famous Quotes
“In the business world, the rearview mirror is always clearer than the windshield.” — Warren Buffett
Proverbs and Clichés
- “Strike while the iron is hot”: Reflects the strategy of issuing shares at a premium during favorable market conditions.
Expressions, Jargon, and Slang
- Blue Chip: High-quality shares, often issued at a premium due to strong market position.
- IPO Pop: The significant rise in share price after a company goes public and issues shares at a premium.
FAQs
What can a share premium account be used for?
Are shares issued at a premium always beneficial?
References
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- Financial Accounting Standards Board (FASB) regulations.
- Historical IPO data from Nasdaq and NYSE.
Summary
Shares issued at a premium are an essential instrument for companies aiming to raise additional capital efficiently. By understanding their historical context, calculation, accounting treatment, and importance, investors and corporations can make informed financial decisions. This concept underscores the dynamic relationship between market conditions and corporate finance strategies.
