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NISM Certifications · NISM-Series-XV: Research Analyst · Corporate Actions

Tara Motors has 10 crore shares trading at Rs 250 and net profit of Rs 200 crore, so EPS is Rs 20 and P/E is 12.5. It announces a 1:1 bonus. Assuming profit is unchanged and P/E stays constant, which combination is correct after the bonus?

EPS falls to Rs 10 and the price to Rs 125. The 1:1 bonus doubles shares to 20 crore, so EPS is Rs 200 crore divided by 20 crore. At a constant P/E of 12.5 the price is Rs 125, leaving market capitalisation unchanged at Rs 2,500 crore.

  1. AEPS Rs 10 and price Rs 125Correct
  2. BEPS Rs 20 and price Rs 125
  3. CEPS Rs 10 and price Rs 250
  4. DEPS Rs 40 and price Rs 500

Explanation

A 1:1 bonus doubles shares to 20 crore. EPS = 200/20 = Rs 10. With P/E at 12.5, price = 12.5 x 10 = Rs 125. Check: market cap 20 x 125 = Rs 2,500 crore equals the earlier 10 x 250. EPS of Rs 20 would ignore the extra shares.

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