CA Intermediate · Financial Management and Strategic Management · Dividend Decision
A company declares a 1-for-1 bonus issue out of free reserves. Which statement about its effect is correct?
A bonus issue capitalises free reserves into share capital, leaving total net worth unchanged. No cash is paid out, and since the number of shares increases, earnings per share falls proportionately rather than rising.
- AIt reduces the company's cash balance
- BIt increases total shareholders' funds
- CIt capitalises reserves into share capital without changing total net worthCorrect
- DIt increases the company's earnings per share
Explanation
A bonus issue transfers amounts from reserves to paid-up share capital. No cash leaves and total net worth is unchanged. EPS falls because the number of shares rises, not increases.
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