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Bonus Shares Vs Stock Splits In Financial Management

Bonus Shares Vs Stock Splits

Bonus Shares are those shares which are issued to shareholders’ by a healthy company without any cost. These Bonus Shares are issued in proportion to the existing shares a shareholder has as a result of capitalization of reserves.

Bonus Shares Versus Stock Splits

In the wake of a Bonus Issue:

  • In this case the Shareholders’ proportional ownership remains unchanged.
  • The book value per share, the earnings per share and the market price per share decrease but the number of shares increased.

Here is an illustration given on The Effects of Bonus Shares on the Equity proportions of the Balance Sheet.

Part A: Equity Portion before Bonus Issue
Paid-up Share Capital $10000000
100000 shares of $10 each fully paid
Reserves and Surplus $30000000
Part B: Equity Portion after bonus issue in the ratio 2:1
Paid-up Share Capital200000 shares of $10 each fully paid $20000000
Reserves and Surplus $20000000

Few reasons are discussed for Issuing of Bonus Shares:

  • The Bonus issue may likely to bring the market price per share within a more popular range.
  • It increases the number of outstanding shares which involves in promoting more active trading. The normal rate of dividend may likely to decline.
  • The share capital base increases and the company may achieve a more respectable place in the eyes of the investing community.
  • Shareholders regard a Bonus issue as a firm indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividends.
  • This can improve the prospects of raising additional funds. In recent years many firms have issued bonus shares that are prior to the issue of convertible debentures.

Definition: An increase in the number of outstanding shares of a company’s stock, such proportionate equity of shareholders remains same. This requires approval from the Board of Directors and the Shareholders. A Corporation, whose stock is performing good may, chooses to split its shares and distributing additional shares to existing Shareholders’. In a stock split the par value per share is reduced and the number of shares is increased proportionately.

An illustration to exhibit the nature of these change effects of a Stock Split on the Equity Proportions of a balance Sheet:

Part A: Equity Portion Before Stock Split
Paid-up Share Capital100000 shares of $50, each fully paid $5000000
Reserves and Surplus $10000000
Part B: Equity Portion after Stock Split in the ratio of 5:1
Paid-up Share Capital500000 shares of $10, each fully paid $5000000
Reserves and Surplus $10000000

Comparison of Bonus Shares and Stock Splits:

Bonus Issue Stock Splits
The Par Value of the share is unchanged The Par Value of the share is reduced
A part of reserves is Capitalized There is no Capitalization of reserves
The Shareholders’ Proportionalownership remains unchanged. The Shareholders’ Proportionalownership remains unchanged.
The book value per share, earnings per share and the market price per share decline. The book value per share, earnings per share and the market price per share decline.
The market price per share is brought within a more popular trading range. The market price per share is brought within a more popular trading range.

Here we can see a Stock Split is similar to the Bonus Issue from the economics point of view, although there are some differences in accounting point of view.

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This article is in continuation with our previous articles on Finance that include Private Capital and Venture Capital, Mergers & Acquisitions, CAPM Model, Capital Structure

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