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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

Which of the following is a form of dividend that does not involve any outflow of cash from the company and does not change its total net worth?

Bonus shares issued out of free reserves are the correct answer. They convert reserves into share capital without any cash outflow, so total net worth is unchanged. Every cash dividend, whether interim, final or paid electronically, reduces both cash and the reserves of the company.

  1. AInterim cash dividend
  2. BBonus shares issued out of free reservesCorrect
  3. CFinal cash dividend
  4. DDividend paid through a bank transfer

Explanation

A bonus issue capitalises reserves into share capital, so no cash leaves the firm and total net worth stays the same; only the composition between reserves and share capital changes. Cash dividends, whether interim, final or paid by bank transfer, reduce cash and reserves.

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