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CA Intermediate · Financial Management and Strategic Management · Dividend Decision

Which of the following best describes a stock split, as distinct from a bonus issue?

A stock split reduces the face value per share and increases the number of shares outstanding, while share capital and reserves remain unchanged. A bonus issue, by contrast, converts reserves into paid-up share capital.

  1. AIt reduces the face value per share and increases the number of shares, leaving reserves unchangedCorrect
  2. BIt capitalises reserves into paid-up share capital at no cost to shareholders
  3. CIt returns cash to shareholders by repurchasing their shares
  4. DIt pays dividend to shareholders in the form of debentures

Explanation

A stock split divides each share into more shares of lower face value; share capital total and reserves stay unchanged. A bonus issue capitalises reserves, increasing paid-up capital. Buyback returns cash.

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