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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Kaveri Auto Ltd has 5 lakh equity shares of Rs 10 each. It issues 1 bonus share for every 5 held, out of free reserves. What is the effect on the equity share capital and on total shareholders' funds?

Share capital increases by Rs 10 lakh because 1 lakh bonus shares of Rs 10 are issued, but free reserves fall by the same amount. Total shareholders' funds therefore stay unchanged, as a bonus issue raises no new money.

  1. AShare capital rises by Rs 10 lakh; total shareholders' funds rise by Rs 10 lakh
  2. BShare capital rises by Rs 10 lakh; total shareholders' funds remain unchangedCorrect
  3. CShare capital remains unchanged; total shareholders' funds rise by Rs 10 lakh
  4. DShare capital rises by Rs 50 lakh; total shareholders' funds remain unchanged

Explanation

Bonus shares = 5 lakh / 5 = 1 lakh shares x Rs 10 = Rs 10 lakh added to share capital. This is funded by transferring Rs 10 lakh from free reserves, so total shareholders' funds do not change. The first option wrongly treats a bonus as fresh money raised.

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