CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Which of the following is a correct statement about a bonus issue of shares compared with a cash dividend?
A bonus issue capitalises existing reserves into share capital, so no cash leaves the company and total net worth remains the same. Shareholders simply receive more shares, and the price per share adjusts, unlike a cash dividend, which involves an actual outflow.
- AIt reduces the total net worth of the company
- BIt capitalises reserves and does not result in a cash outflowCorrect
- CIt increases the total market capitalisation of the firm by the bonus value
- DIt results in a cash outflow equal to the par value of shares issued
Explanation
A bonus issue converts free reserves into share capital. There is no cash outflow and total net worth is unchanged; only its composition changes. Market capitalisation does not rise by itself, as the price per share adjusts downward.
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