Corporate Actions: formula sheet

Key formulas

Classification rule

Mandatory = automatic for all eligible holders; Voluntary = holder must choose and act

Use this first to classify any action in a question.

Entitlement rule

Benefit goes to holders on the record date; buyers on or after the ex-date are not on the books on the record date and do not get it

The ex-date is the first day the share trades without the entitlement. The exchange sets it based on the record date and the settlement cycle. Under T+1 it is normally the same day as the record date. Do not state exact settlement gaps unless the question gives them.

Split effect on shares and price

New shares = old shares × split ratio; New price ≈ old price ÷ split ratio

Total value is unchanged in theory. Face value falls by the same ratio.

Bonus effect on shares and price

For a bonus of a:b (a new for every b held), new shares = old shares × (a + b) ÷ b; price ≈ old price × b ÷ (a + b)

Reserves are capitalised. No cash moves and total value is unchanged in theory.

Dividend per share (DPS)

DPS = Total dividend ÷ Number of shares

Dividend is declared as a percentage of face value or as ₹ per share. A 50% dividend on a ₹10 face value share is ₹5 per share.

Dividend payout ratio

Payout ratio = DPS ÷ EPS = Total dividend ÷ Net profit

Use profit available to equity shareholders. Express as a percentage.

Retention ratio

Retention ratio = 1 − Payout ratio

The share of earnings kept in the business.

Dividend yield

Dividend yield = DPS ÷ Market price per share × 100

Uses market price, not face value.

Ex-dividend price adjustment

Ex-date price ≈ Cum-dividend price − Dividend per share

An approximation for the expected drop, not a fixed rule.

Share count after bonus

New shares = old shares × (1 + a ÷ b), for a bonus of a:b (a new shares for every b held)

A 1:1 bonus doubles the count. A 2:5 bonus multiplies it by 1.4.

Adjustment factor for bonus

Factor = (a + b) ÷ b

Divide old price, EPS and DPS by this factor. Multiply old share count by it.

Ex-bonus price

Ex-bonus price = cum-bonus price × b ÷ (a + b)

Theoretical price, assuming market cap is unchanged.

Split factor

Factor = old face value ÷ new face value

A ₹10 to ₹2 split gives a factor of 5, so shares rise five times.

Post-split price and EPS

New price = old price ÷ factor; new EPS = old EPS ÷ factor

Book value per share and DPS adjust the same way.

Market capitalisation

Market cap = price × number of shares

Unchanged by a bonus or split in theory.

Effect on paid-up capital

Bonus: capital rises by new shares × face value, reserves fall by the same amount. Split: capital and reserves unchanged.

Net worth is unchanged in both.

Theoretical ex-rights price (TERP)

TERP = (N × Pcum + n × Pissue) ÷ (N + n)

N = old shares in the ratio, n = new shares in the ratio, Pcum = cum-rights market price, Pissue = rights issue price.

TERP for ratio 1:k

TERP = (k × Pcum + Pissue) ÷ (k + 1)

Use for 1 new share for every k held. For 2 new for 5 held, use the general formula instead.

Value of a right (per new share)

Value of right = TERP − Pissue

Value for one new share. It is positive when TERP is above the issue price.

Value of a right (per old share held)

Value per old share = (Pcum − Pissue) × n ÷ (N + n)

Equals the fall in price per old share, Pcum − TERP.

Fall in price

Pcum − TERP

Expected price drop per old share on the ex-rights date.

Funds raised

Funds raised = new shares issued × issue price

Gross amount before issue expenses.

Entitlement

New shares = holding × n ÷ N

Round as per the company's stated treatment of fractions. Check the question.

Share swap ratio (by value per share)

Swap ratio = Value per share of target ÷ Value per share of acquirer

Gives acquirer shares issued per 1 target share. Use the same valuation basis for both.

New shares issued

New acquirer shares = Target shares outstanding × Swap ratio

Fractional entitlements are usually settled in cash or consolidated.

Swap ratio stated as X:Y

X : Y means X acquirer shares for every Y target shares

Example: 2:5 means 2 new shares for every 5 held, so ratio = 0.4.

Demerger entitlement

Resulting company shares received = Shares held × Entitlement ratio, where Entitlement ratio = X ÷ Y for a ratio stated as X:Y

Example: 1:2 means 1 resulting-company share for every 2 held, so the entitlement ratio = 1 ÷ 2 = 0.5.

Types of merger

Horizontal = same business; Vertical = supply chain; Conglomerate = unrelated

Learn these as one-line identifiers for MCQs.

Spin-off value check

Parent value before = Parent value after + Value of spun-off shares received

Shareholder wealth is unchanged at the moment of the action, before market moves.

Value per spun-off share received

Shares received = Parent shares held × Entitlement ratio

If the ratio is 1 new share for every 2 held, multiply by 1 ÷ 2.

Conversion effect on share count

New equity shares = Securities converted × Conversion ratio

Higher share count dilutes EPS if earnings do not rise.

Diluted EPS idea

EPS after conversion = Earnings ÷ (Existing shares + New shares from conversion)

Adjust earnings too if interest or dividend on the converted security stops.

Voluntary delisting price

Exit price = price discovered through reverse book building

Shareholders state the price they will accept; it is not set by a fixed formula.

Quick revision

• A corporate action is a company decision that affects its shares, capital or ownership.
• Dividend dates run in order: announcement, ex-date and record date (the same day under T+1), then payment date.
• Buying on or after the ex-date does not entitle you to the dividend; you must buy before the ex-date.
• Share price adjusts downward on the ex-date by roughly the dividend amount.
• A bonus issue gives free shares from reserves; total value is unchanged, so the price falls.
• A stock split reduces face value and raises share count; market capitalisation does not change.
• After a bonus or split, adjust historical EPS and prices for comparison.
• Rights issue offers existing shareholders new shares, usually at a discount, in proportion to holdings.
• Theoretical ex-rights price = (old shares × market price + new shares × rights price) ÷ total shares.
• A buyback reduces shares outstanding and usually raises EPS.
• A merger combines companies; a demerger separates a business into a new entity.
• Delisting removes shares from an exchange; check who approves and the exit offer to shareholders.

Common mistakes

• Calling a rights issue mandatory because every shareholder receives the offer. Fix: Rights are voluntary. You can subscribe, sell the entitlement where permitted, or let it lapse.
• Thinking a bonus issue or split raises money for the company. Fix: Neither brings in cash. Bonus capitalises reserves; split only divides existing shares.
• Using face value in the dividend yield formula. Fix: Convert to ₹ per share using face value, then divide by market price for yield.
• Thinking a buyer on the ex-dividend date gets the dividend. Fix: A buyer must buy before the ex-date. On or after it, the seller keeps the dividend.
• Treating a 1:1 bonus as a 1:2 split or the reverse. Fix: Ask what changes. If face value changes, it is a split. If reserves turn into capital, it is a bonus.
• Using a:b as total shares after the bonus instead of new shares. Fix: Bonus ratio is new:held. Factor = (a + b) ÷ b.
• Swapping N and n in the formula. Fix: Read the words. '2 for 5' means 2 new for 5 held. Write N = 5, n = 2 before you start.
• Taking a simple average of the market price and the issue price. Fix: Always weight each price by the number of shares at that price.
• Inverting the swap ratio Fix: Target value goes on top. If the target's value per share is lower than the acquirer's, the ratio is below 1.
• Mixing up vertical and horizontal mergers Fix: Horizontal means competitors. Vertical means supplier-customer chain.

Exam tips

• Expect direct classification questions: given an action, say mandatory or voluntary. Memorise the lists, not just the definitions.
• Watch for options that say a split or bonus changes total value. In theory it does not.
• Read for words like 'purpose' and 'impact'. Purpose is why the company acts; impact is what changes for you.
• For ratio questions, always check the answer by multiplying shares by price before and after.
• Where negative marking applies (25% of the marks for the question), skip an option set you cannot narrow down rather than guessing blind.
• Learn the date order: declaration, ex-date, record date, payment. Under T+1 the ex-date generally coincides with the record date.
• Read whether the question gives a percentage dividend or ₹ per share. Percentage means multiply by face value.
• Yield uses market price; payout uses earnings. Trap options swap them.