You work as a Corporate Risk Analyst at JP Morgan. You clients Peter and Angela are planning to start a new company and have come to you for advice.

Question

(a)Your clients heard a lot about liquidity, describe to them what is meant by the liquidity of the share market? Explain why liquidity in the secondary market is important both to shareholders and to the corporations.

(b)Describe to your clients two methods a listed company could use to issue ordinary shares. Discuss the advantages and disadvantages of each.

(c)Peter and Angela are still unsure what the differences between ordinary shares and preference shares are. Distinguish between them in terms of:

(i)Risk

(ii)Return

(iii)Time pattern of returns

(d) Finally, your clients are concerned about the type of liability faced by the owners of a company. Outline and briefly discuss at least three types of calcification of company by liability to them