Jessica Limited has total assets of £12,000,000 and total liabilities of £8,000,000 when the company goes into liquidation. The issued share capital of the company comprises of 8,000,000 ordinary shares of 50 pence each and 1,000,000 5% preference shares of £1 each. Jessica Limited's assets are eventually sold for £11,000,000 and this cash is used to pay off the liabilities of £8,000,000 in full. How much money will be divided between Jessica Limited's ordinary shareholders?

Question

Quizplus · Accepted Answer

The preference shareholders have a prior claim to the assets of the company in the event of liquidation. They are entitled to be paid their share capital in full before the ordinary shareholders receive anything. The preference shareholders are entitled to £1,000,000 (1,000,000 shares x £1 per share). This leaves £3,000,000 (£11,000,000 - £8,000,000 - £1,000,000) to be divided between the ordinary shareholders. The ordinary shareholders are entitled to £2,000,000 (8,000,000 shares x 50 pence per share).

Jessica Limited Has Total Assets of £12,000,000 and Total Liabilities