MCQs Course for SEBI Grade A 2020 - Paper 2

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1. Which one of the following statements is not correct?

A. Bonus shares can be issued out of General Reserves

B. Bonus shares can be issued in lieu of dividends

C. The partly-paid shares, if any, should be made fully paid up before the
company can make a bonus issue

D. The bonus issue should be out of free reserves built out of the genuine
profits or security premium collected in cash only

Ans: B

A bonus issue means an issue of free additional shares to existing

shareholders.

2. Bonus shares can be issued out of which?

A. Balance of Profit and Loss Account

B. Share premium account

C. Capital Reserve

D. All of these

Ans: D

Bonus shares are issued by cashing in on the free reserves of the company.
The assets of a company also consist of cash reserves. A company builds up
its reserves and share premium by retaining part of its profit over the years
(the part that is not paid out as dividend).

3. What is the formula of Earning Per Share (EPS)?

A. EBIT(earnings before interest and taxes ) / Equity shares

B. (EBIT - Preference Dividend) / Equity shares

C. EAT(Earning after-tax) / Equity shares

D. (EAT - Preference Dividend) / Equity shares

Ans: D

Earnings per share (EPS) is calculated as a company's profit divided by the

outstanding shares of its common stock. The resulting number serves as an
indicator of a company's profitability.

(EAT - Preference Dividend) / Equity shares

4. Under which of the following conditions Bonus share will not be

permitted?

A. partly paid

B. semi paid

C. fully paid

D. unpaid

Answer: A

Bonus shares are not permitted unless the partly paid shares, if any, are
made fully-paid. Bonus shares are shares distributed by a company to its
current shareholders as fully paid shares free of charge.

5. Which one of the following cannot be used for the issue of bonus
shares?

A. Capital redemption reserve

B. General reserve

C. Share premium
D. Revaluation reserve

Answer: D

As per sub-section (1) of Section 63 of the Companies Act, 2013:

A Company may issue Bonus Shares out of- its free reserves; Securities
Premium Account; Capital Redemption Reserve Account. Further, it has
been provided that the Issue of Bonus Shares shall not be made out of
Capitalising Reserves created out of the revaluation of Reserves. Free
Reserves means such reserves of the Company which is available for
distribution as Dividend.

6. What is the most common form of bonus?

A. Cash bonus

B. Compound bonus

C. Dividend

D. Reversionary bonus

Answer: D

Reversionary bonus is the bonus declared every year as a percentage of

(Guaranteed Maturity Benefit/Sum Assured + Earlier Reversionary
Bonuses). It is payable on the death of the life assured or maturity of the
policy.

7. Which of the following methods does a firm resort to avoid dividend

payments?

A. Share splitting

B. Declaring bonus shares

C. Rights issue

D. New issue

Answer: B
Declaring bonus shares methods does a firm resort to avoid dividend
payments. Bonus shares are shares distributed by a company to its current
shareholders as fully paid shares free of charge. to capitalize a part of the
company's retained earnings.

8. The bonus issue is permitted to be made out of which of the

following?

A. free reserves

B. free interest

C. free bonus

D. free cash dividend

Answer: A

The bonus issue is permitted to be made out of free reserves and premium
collected in cash. A bonus issue, also known as a scrip issue or a
capitalization issue, is an offer of free additional shares to existing
shareholders.

9. The bonus issue is made to make the nominal value of the shares of
the company at which of the following price?

A. Face

B. Market

C. Real

D. All of the above

Answer: B

The bonus issue is made to make the nominal value and the Market value of
the shares of the company. A bonus issue, also known as a scrip issue or a
capitalization issue, is an offer of free additional shares to existing
shareholders.

10. In respect of Bonuses, which of the following is incorrect?

A. Bonuses once declared, get attached to the policy and can’t be taken
away.

B. Bonuses form part of the liability of a company.

C. Premiums need not have been paid for a specified number of years.

D. All of the above.

Answer: C

In respect of Bonuses, Premiums need to be paid for a specified number of

years.

11. Which is a bonus?

A. Simple reversionary bonus

B. Compound reversionary bonus

C. Terminal bonus

D. Any of the above

Answer: D

Simple reversionary bonus, Compound reversionary bonus, and Terminal

bonus, all this are bonus.

A simple reversionary bonus is a with-profits life assurance bonus,

normally declared annually, which is based on the profits of the life
company's investment and is payable at the maturity of the policy or prior
death. Simple Reversionary Bonus (SRB) This type of bonus is calculated on
the sum assured only. This bonus is declared annually and is accrued to be
paid out at the time of a claim or maturity.

Terminal Bonus is also known as a persistency bonus which is paid once,

i.e. at the time of maturity of the policy.

12. With the duration/term of the policy, the terminal Bonus would?

A. Increase
B. Decrease

C. Either increase/decrease

D. Bear no connection

Answer: A

Terminal Bonus would increase with the duration/term of the policy.

13. Why Bonus shares are issued by companies?

A. Surplus cash is available

B. There are heavy accumulated general reserve

C. There is heavy competition from similar companies

D. They have heavy gross- profit ratio

Ans: B

Bonus shares are additional shares given to the current shareholders

without any additional cost, based upon the number of shares that a
shareholder owns. These are the company's accumulated earnings which
are not given out in the form of dividends but are converted into free
shares.

In other words, when a company is prosperous and accumulates a large

surplus, it converts this surplus into capital and divides the capital among
the members in proportion to their rights.

The essential reason behind the issuance of bonus shares is to capitalize on

profits and increase a company’s equity base and therefore, the
shareholders to whom the shares are allotted have to pay nothing.

14. When bonus shares are issued, the average cost of the existing
shares will be?

A. Reduced

B. Increased
C. Equal

D. None of these

Ans: D

Companies issue bonus shares to encourage retail participation and

increase their equity base. When the price per share of a company is high,
it becomes difficult for new investors to buy shares of that particular
company. An increase in the number of shares reduces the price per share.
But the overall capital remains the same even if bonus shares are declared.

15. Bonus shares are issued out of which of the following?

A. Capital reserve

B. Free reserve

C. Share premium

D. None of these

Ans: B

Out of free reserves: the bonus issue shall be made out of free reserves built
out of genuine profits or share premium collected in cash only

16. What is the use of the Capital Redemption Reserve Account?

A. Writing off past losses

B. Issuing partly paid bonus shares

C. Writing off capital losses

D. Issuing fully paid bonus shares

Ans: D

It is quite natural that every prudent company would like to create reserve
out of its profit for the purpose of future expansion as-well-as for declaring
dividends in the lean periods.
A company that has built up substantial reserves some decides to
capitalize a part of these reserves:

(i) By issuing fully paid bonus shares to existing shareholders and/or

(ii) By converting partly paid-up shares into fully paid- up shares without
the shareholders to pay anything.

All successful companies increase their capital base by giving free shares.

17. Security premium account can be utilized for which of aim?

A. Issuing fully paid bonus shares

B. Write off preliminary expenses

C. Write off underwriting commission

D. All of these

Ans: D

A share premium account is typically listed on a company’s balance sheet.

This account is credited for money paid, or promised to be paid, by a
shareholder for a share, but only when the shareholder pays more than the
cost of a share. This account can be used to write off equity-related
expenses, such as underwriting costs, and may also be used to issue bonus
shares.

18. In which form profit are capitalized?

A. Bonus Issue

B.Right Issue

C.Both

D. None of these

Ans: A
The profits are capitalized in the form of a bonus issue (known as stock
dividends in the western countries especially the USA.The bonus issue
represents a distribution of additional shares to the existing shareholders
in proportion to the number of shares held by them in the company.

19. Why Bonus Shares are Issued by the Companies?

A. To reward the investors

B. To increase the liquidity of the shares

C. To adjust the stock price.

D. All of these

Ans: D

To reward the investors: Issuing of the additional shares is one of the ways
of showing appreciation to the investors. Also, the confidence of the
investors get boosted, which is altogether good for the company.

To increase the liquidity of the shares: When the bonus shares are issued by
the company, then leads to an increase in the number of outstanding
shares. As there are higher outstanding shares, the participation of the
traders gets increased, which in turn increases the liquidity of the stocks.

To adjust the stock price: Whenever a company decides to issue bonus

shares, then the prices of the stocks fall to a reasonable range. It is
beneficial for those investors who were not able to buy the shares earlier
because of the higher price.

20. What are the advantages of a bonus share from the shareholder's point
of view?

A. The bonus shares are considered as a permanent source of income for

the investors.

B. The bonus shares are considered as a permanent source of income for

the investors.

C. Shareholders don’t have any liability to pay taxes on bonus shares.

D. All of these

Ans: D

Advantages from the shareholder’s viewpoint:

The bonus shares are considered as a permanent source of income for the
investors. Even though the rate of dividend falls, the total amount of
dividends may increase because the investor will get the dividend on a
larger number of shares. Investors can easily sell these additional shares
and receive immediate cash if they desire to do so.

Shareholders don’t have any liability to pay taxes on bonus shares.