CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which of the following best describes a bonus share issue by a company, as a form of dividend?
A bonus issue capitalises reserves by giving existing shareholders additional shares in proportion to their holdings. No cash is paid or received, so total shareholder wealth is unchanged, unlike a cash dividend, a buy-back or a fresh public issue.
- ACapitalisation of reserves by issuing additional shares to existing shareholders without any cash inflow or outflowCorrect
- BPayment of cash to shareholders out of current year profits
- CRepurchase of shares from shareholders at a premium
- DIssue of new shares to the public at a discount
Explanation
A bonus issue converts free reserves into share capital and distributes additional shares to existing members in proportion to holdings. No cash moves, so it differs from a cash dividend. Buy-back and public issues are different transactions.
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