CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Which of the following best describes a bonus share issue by a company?
A bonus issue capitalises reserves into share capital. No cash moves and no fresh funds are raised, so total shareholders' funds remain unchanged; only the split between reserves and share capital changes, and the number of shares held increases.
- ACapitalisation of reserves that leaves total shareholders' funds unchangedCorrect
- BA cash payment out of current profits that reduces net worth
- CIssue of new shares at a premium to raise fresh funds
- DRepurchase of shares from existing shareholders
Explanation
A bonus issue converts free reserves into share capital. No cash leaves the firm and no fresh funds are raised, so total net worth stays the same; only its composition changes. Cash dividends reduce reserves and cash.
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