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Spec mapping: AQA 7138 Unit 3.1.2 — Forms of business and stakeholders (refer to the official AQA specification document for exact wording). This lesson sits at the analytical centre of Unit 3.1.2 — it builds the conceptual and quantitative tools that distinguish a plc from every other business form: ordinary and preference shares, voting rights, the share-capital structure, market capitalisation, dividend mechanics, dividend yield, and the drivers of share-price formation. The accredited spec lifts share-metric quantitative content into Unit 3.1.2 (it sat partially in legacy-spec finance content), which makes this lesson the natural home for market capitalisation, dividend per share, dividend yield and the conceptual framing of influences on share price. The 15-mark Evaluate at the end of this lesson is the discriminator-style worked example for the 7138 paper format.
Connects to:
Definition: Share capital is the money a limited company has raised by issuing shares to investors. Each share represents a divisible unit of ownership in the company — a residual claim on the company's net assets and a residual claim on its profits after every more senior claim (suppliers, lenders, tax, preference shareholders) has been satisfied.
Share capital is conceptually different from every other source of finance a business uses. Bank loans, bonds and trade credit are contractual claims — the lender or supplier is entitled to a fixed payment on a defined date, regardless of how the business performs. Share capital is a residual claim — ordinary shareholders are paid only after every contractual claim has been settled, and only at the discretion of the board of directors. That residual structure is what makes equity risk capital: ordinary shareholders bear the operational and strategic risk of the business in exchange for a potentially unbounded upside if the business succeeds.
Three implications follow that an A-Level Evaluate answer is expected to handle:
| Term | Meaning | A-Level relevance |
|---|---|---|
| Authorised share capital | The maximum value of shares a company is permitted to issue under its articles. Abolished as a default for companies formed after October 2009 under the Companies Act 2006; still applies to many older companies | Historical context; do not waste analytical effort here unless the case study specifies it |
| Issued share capital | The total nominal value of shares actually issued to shareholders | The basis for the ownership calculation and the divisor in dividend per share |
| Called-up share capital | Shares the company has demanded payment for from shareholders | Rarely examined at A-Level depth |
| Paid-up share capital | Shares that shareholders have actually paid for in full | Important when a company issues partly-paid shares to spread investor cash flow |
| Ordinary share capital | The most common class — voting rights, residual dividend, residual capital | The default class in case studies; usually what the question refers to when it says "shares" |
| Preference share capital | Fixed-rate dividend, usually no voting rights, paid before ordinary dividend | Important in finance-structure questions; not permanent in the same way ordinary equity is |
For A-Level purposes the default frame is ordinary share capital — when a case study refers simply to "shares" or "shareholders" without qualifying it, the ordinary class is meant.
The distinction between ordinary and preference shares is the single most important share-capital distinction at A-Level and is repeatedly examined.
| Feature | Ordinary shares | Preference shares |
|---|---|---|
| Dividend | Variable, at board's discretion, paid after preference dividend | Fixed % of nominal value, paid before ordinary dividend |
| Voting rights | Usually one vote per share | Usually no voting rights |
| Capital priority on liquidation | Paid last (after all creditors and preference shareholders) | Paid before ordinary shareholders but after creditors |
| Upside if the business grows | Unlimited — the residual claim captures all upside | Capped at the fixed dividend rate |
| Downside if the business fails | Unlimited (up to invested capital) — the residual position bears the loss first | Limited — preferred over ordinary in the queue |
| Cumulative? | Not applicable | Many preference shares are cumulative — missed dividends accrue and must be paid before any ordinary dividend |
| Conversion rights | Not applicable | Some preference shares are convertible into ordinary shares at a defined ratio |
A finance director choosing between issuing ordinary shares and issuing preference shares is making a real trade-off between dilution of control (ordinary shares spread voting power) and the cost of capital (preference dividend is contractually expected even if not legally guaranteed). The choice has knock-on effects for the gearing (Annex 8 financial concept #15) of the business, because some accountants treat fixed-rate preference shares as more debt-like than equity-like depending on the terms.
A company raises share capital through one of several mechanisms — private subscription (sale to founders, family or angel investors), private placing (institutional investors without a public offer), initial public offering (the first sale to the public alongside a stock-exchange listing), rights issue (existing shareholders offered new shares pro-rata, typically at a discount), and open offer (a non-tradable variant of a rights issue). The choice trades off speed, cost, dilution and signalling. A rights issue protects existing shareholders from dilution but is slow and expensive; a placing is fast and cheap but dilutes existing shareholders.
UK plcs list on the LSE Main Market (the senior venue — FTSE 100 / 250 / SmallCap constituents) or AIM (the junior market with lighter listing rules and tax-advantaged status for some UK retail investors). AIM-listed companies access a smaller pool of capital but face lighter regulatory cost; Main-Market-listed companies face higher reporting and corporate-governance demands but command a deeper investor base.
Definition: Market capitalisation is the stock market's total valuation of a listed company's ordinary equity — the product of the current share price and the number of ordinary shares in issue.
Market capitalisation = Number of issued shares × Current share price (Annex 7 formula 1 — provided in the exam formula sheet)
Market capitalisation differs from book value (the equity figure on the balance sheet) and from enterprise value (market cap plus net debt minus cash). At A-Level depth, the distinction that matters is market cap vs book value:
The two diverge widely. Technology companies with negligible tangible assets and high expected growth often trade at market caps many multiples of their book value; mature manufacturing companies with substantial fixed assets may trade close to or below book value. The ratio of market cap to book value (the price-to-book ratio) is itself a diagnostic of how the market is valuing future prospects vs current assets.
A hypothetical UK plc, Northwold Foods plc, has 480 million ordinary shares in issue. The current share price is £4.85.
Market capitalisation = 480,000,000 × £4.85 = £2,328,000,000 = £2.33 billion
Figures fabricated for illustrative purposes; not affiliated with any actual business.
This places Northwold Foods plc in the mid-cap band (£1bn–£10bn) of the UK market — large enough to attract institutional research coverage but small enough that family or founder ownership might still influence control. If the share price rises 12 % to £5.43, market cap rises to £2,606m, an increase of £278m — none of which has flowed through the income statement; all of it has been generated in the secondary market by investors revising their expectations.
| Category | Market cap | Typical examples (UK-listed) |
|---|---|---|
| Mega-cap | Over £100 billion | The very largest globally listed companies; rare on the LSE Main Market |
| Large-cap | £10bn – £100bn | FTSE 100 constituents — large UK supermarkets, integrated oil majors, large banks |
| Mid-cap | £1bn – £10bn | FTSE 250 constituents — mid-sized retailers, specialist engineers, regional banks |
| Small-cap | Under £1bn | FTSE SmallCap and many AIM-listed growth companies |
The category matters because index inclusion drives passive-fund demand — a company crossing the threshold into the FTSE 100 attracts substantial buying from index funds tracking the index, independent of the underlying business performance.
Definition: A dividend is a distribution of profits from a company to its ordinary shareholders, paid out of distributable reserves at the board's discretion. Dividends are typically expressed in pence per share and may be paid semi-annually (an interim and a final dividend) or quarterly.
Dividends are the principal mechanism by which a profitable company returns cash to its owners. A company that consistently pays a dividend signals confidence in future cash flow; a company that cuts a dividend signals stress.
Dividend per share = Total dividend paid ÷ Number of ordinary shares in issue (Annex 7 formula 2 — provided in the exam formula sheet)
If Northwold Foods plc pays a total ordinary dividend of £72 million across the year and has 480 million ordinary shares in issue:
Dividend per share = £72,000,000 ÷ 480,000,000 = £0.15 = 15.0p per share
A shareholder holding 8,000 ordinary shares would receive £1,200 in dividend income across the year — assuming the dividend is sustained.
The dividend per share is a per-share figure that does not allow comparison between companies with different share prices. Dividend yield normalises by share price:
Dividend yield (%) = (Dividend per share ÷ Share price) × 100 (Annex 7 formula 3 — provided in the exam formula sheet)
For Northwold Foods plc at a share price of £4.85 and dividend per share of 15.0p:
Dividend yield = (15.0p ÷ 485p) × 100 = 3.09 %
A 3.09 % yield is broadly typical of a mature, established UK mid-cap food company. A growth-stage tech company might offer a yield of 0 %; a mature utility or tobacco company might offer 6–8 %; a stressed company whose share price has fallen sharply might show a high "headline" yield that the market doubts will be sustained.
Dividends and dividend yield are explicitly listed as an Annex 8 sophisticated concept (financial concept #13). A 15-mark Evaluate answer that visibly deploys dividend-yield reasoning — not just as a calculation but as a diagnostic of the company's life-cycle stage and shareholder-base expectations — qualifies for Annex 8 sophisticated-concept credit.
A board sets dividend policy by weighing competing claims on the same pool of cash — income shareholders (wanting generous, predictable dividends), growth shareholders (wanting reinvestment at high rates of return), lenders (wanting sufficient retention to service debt), operational needs (wages, working capital, reinvestment) and the board's own preference for cash on hand against shocks.
Three broad archetypes emerge: high-payout / high-yield (60–80 % payout — mature utilities and consumer staples with stable cash flow); reinvestment / low-payout (little or no dividend — growth-stage tech companies with high-return reinvestment opportunities); and progressive / steadily growing (moderate dividend that grows year-on-year regardless of short-term profit fluctuations — many UK FTSE 100 industrials). The choice is not value-neutral: mature companies clinging to high payouts when growth opportunities have evaporated may be efficiently returning capital to investors who can deploy it elsewhere; mature companies that hoard cash for low-return reinvestment may be destroying shareholder value despite a healthy income statement.
flowchart TD
Profit["Operating profit"] --> Tax["HMRC<br/>(corporation tax)"]
Profit --> Interest["Lenders<br/>(interest)"]
Profit --> PrefDiv["Preference shareholders<br/>(fixed dividend)"]
Profit --> Retain["Retained earnings<br/>(funding reinvestment)"]
Profit --> OrdDiv["Ordinary shareholders<br/>(variable dividend)"]
Retain --> Reinvest["Reinvestment<br/>(capex / R&D / M&A)"]
OrdDiv --> Yield["Dividend yield<br/>(% of share price)"]
Reinvest --> FutureProfit["Future operating profit"]
FutureProfit -. compounds .-> Profit
style Profit fill:#1d4ed8,color:#fff
style OrdDiv fill:#15803d,color:#fff
style Retain fill:#a16207,color:#fff
The dotted arrow back to operating profit is the analytically critical feature — retained earnings re-enter the operating cycle as reinvestment capital, generating future profit that is itself eventually split again between tax, lenders, preference holders, retention and ordinary dividend. The dividend-vs-retention question is therefore not a one-shot decision but an ongoing compounding choice.
Share price is set by supply and demand in the secondary market. Fundamentals (profit, cash flow, growth prospects, dividend, balance-sheet strength) anchor the price in the medium term; sentiment and flows move it day-to-day.
| Driver category | Examples and mechanism |
|---|---|
| Fundamental | Operating profit and growth; cash-flow conversion; dividend level and growth; balance-sheet strength (gearing, liquidity); ROCE; growth optionality; market-share trajectory |
| Contextual | Interest rates (higher discount rates compress present values); currency moves; sector rotation; ESG / index inclusion or exclusion driving passive flows |
| Sentiment / flow | Analyst rating changes; activist stake disclosures (a 5 %+ activist disclosure can move the share price 5–15 % in a day); media coverage; heavy short positioning creating squeeze conditions; macro shocks compressing P/E multiples market-wide |
A useful A-Level move is to distinguish transient drivers (a one-off analyst upgrade, a media story, a short squeeze) from structural drivers (a sustained shift in operating margin, a change in industry structure, a regulatory regime change). The former produce volatility; the latter produce durable revaluations.
Northwold Foods plc is a UK-listed mid-cap food manufacturer with 480 million ordinary shares in issue at a share price of £4.85 (market capitalisation £2.33 billion). The business produces branded chilled-cabinet ready meals for the UK supermarket sector. Revenue in the most recent financial year was £1.42 billion; operating profit was £128 million (9.0 % operating profit margin); operating cash flow was £121 million. The board has historically pursued a progressive dividend policy — paying out roughly 56 % of profit for the year (a recent dividend per share of 15.0p, giving a 3.09 % yield). Retained earnings have funded a steady programme of factory modernisation. The business is mature: UK ready-meal market growth has slowed from 4–5 % per annum in the early 2020s to roughly 1.5 % per annum by 2026, and Northwold's market share has plateaued at 11.2 %. Two strategic alternatives are now on the table for the next three years. Option X — Lift dividend payout to 80 % of profit for the year (raising dividend per share from 15.0p to approximately 21.4p, lifting yield towards 4.4 %), returning roughly £30 million of additional cash per year to shareholders. Option Y — Hold dividend per share flat at 15.0p and use the cumulative ~£90 million of retained earnings over three years to acquire two adjacent specialist food businesses (plant-based and premium chilled bakery), aiming to diversify revenue and lift group operating profit by an estimated 12–18 % over five years. Activist investor Apex Yield Partners has acquired a 4.2 % stake and is publicly arguing for Option X; the founding family, who collectively hold 14 % of the equity through a family trust, are signalling support for Option Y.
Figures fabricated for illustrative purposes; not affiliated with any actual business.
Evaluate the two options for Northwold Foods plc and recommend which the board should pursue. (15 marks)
| AO | What the question rewards | Mark weighting on this 15-mark item |
|---|---|---|
| AO1 | Knowledge of share capital, dividend mechanics, dividend per share, dividend yield, market capitalisation, the dividend-vs-reinvestment trade-off and the shareholder / stakeholder framework | ~3 marks |
| AO2 | Application to Northwold's specific figures — payout ratio, dividend per share under each option, implied yield, M&A target uplift, activist stake, family-trust holding | ~3 marks |
| AO3 | Analytical chain-of-reasoning — recalculating the per-share economics under each option, mapping each option's effect on market cap, gearing, market share trajectory and stakeholder dynamics | ~5 marks |
| AO4 | Evaluative judgement — weighing the two options against Northwold's life-cycle stage, market position and stakeholder dynamics to issue a recommendation; visible deployment of Annex 8 sophisticated concepts | ~4 marks |
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