CA Intermediate · Financial Management and Strategic Management · Dividend Decision
A company issues bonus shares in the ratio 1:2 out of free reserves. Which of the following is the immediate effect on the company's total shareholders' funds?
Total shareholders' funds remain unchanged after a bonus issue. Free reserves are capitalised, reducing reserves and raising share capital by the same amount, with no cash outflow or inflow. Only the composition of equity changes, and per-share figures such as EPS fall proportionately.
- AIt increases by the face value of bonus shares issued
- BIt decreases by the face value of bonus shares issued
- CIt remains unchanged, as reserves are transferred to share capitalCorrect
- DIt increases by the market value of bonus shares issued
Explanation
A bonus issue capitalises reserves: free reserves are debited and share capital is credited by the same amount. No cash moves and total net worth is unchanged. Only the composition between capital and reserves changes, and EPS and market price per share fall proportionately.
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
- Using Walter's model, Kiran Ltd has EPS of Rs 10, internal rate of return r = 15% and cost of equity ke = 10%. The dividend payout is 40%, s…
- 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…
- Meera Ltd has EPS of Rs 20, a payout ratio of 60%, cost of equity of 10% and return on investment of 10%. Using Walter's model, what is the …
- A company's board decides to pay dividends from a fixed percentage of each year's profit rather than a fixed rupee amount. Which dividend po…
- Aarav Ltd has cost of equity (ke) of 12%, return on investment (r) of 15% and earnings per share of Rs 10. Using Walter's model with a 40% p…
- Meera Auto Ltd has a current market price of ₹150 per share and expects to pay a dividend of ₹9 at the end of year 1. Dividends are expected…