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CA Intermediate · Financial Management and Strategic Management · Dividend Decision

Which statement about stock splits and bonus shares is correct?

A stock split lowers the face value per share and raises the number of shares, while reserves remain unchanged. Bonus issues, in contrast, capitalise reserves into share capital. Neither changes total net worth, so only the statement about splits leaving reserves untouched is correct.

  1. AA stock split reduces the face value per share and increases the number of shares without changing reservesCorrect
  2. BA bonus issue reduces the number of shares outstanding
  3. CA stock split capitalises reserves into share capital
  4. DA bonus issue increases the total net worth of the company

Explanation

A split divides each share into more shares of lower face value, so share capital and reserves stay unchanged. A bonus issue capitalises reserves, raising share capital and the number of shares, but net worth is unchanged. The option claiming splits capitalise reserves confuses split with bonus.

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