CA Intermediate · Financial Management and Strategic Management · Dividend Decision
A company declares a 1-for-1 bonus issue out of free reserves. Which of the following is the correct effect immediately after the issue, other things unchanged?
A bonus issue transfers an amount from free reserves to share capital. Total net worth and cash stay unchanged, while the number of shares rises and the price per share falls proportionately.
- ATotal shareholders' funds increase by the face value of the bonus shares
- BCash outflow occurs equal to the bonus amount
- CShare capital increases and free reserves decrease by the same amount, leaving net worth unchangedCorrect
- DNet worth falls because shares outstanding double
Explanation
A bonus issue capitalises reserves: share capital rises and reserves fall by equal amounts, so total net worth and cash remain unchanged. Option 1 is wrong since no new funds come in; option 2 is wrong as no cash is paid; the per-share value falls, but total net worth does not.
Did you get it right without looking?
One question tells you little. A timed set on Dividend Decision shows your real accuracy, how long you take and where you lose marks.
More Dividend Decision questions
- Sundaram Ltd has 10,00,000 shares at current market price ₹100 each and expects a dividend of ₹5 per share at year end, with ex-dividend pri…
- Which of the following best describes a bonus share issue by a company?
- Which factor would most likely lead a company to follow a LOW dividend payout ratio?
- Using Walter's model, Sarvam Ltd has EPS of ₹10, dividend per share of ₹4, return on investment of 15% and cost of capital of 10%. What is t…
- A company that pays a fixed ₹5 per share dividend every year even when profits fluctuate, raising it only when earnings have risen to a dura…
- Which of the following is a correct statement about a bonus issue of shares compared with a cash dividend?