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E.D Bonus Issues & Stock Splits

This document discusses bonus shares and stock splits. It defines bonus shares as the distribution of free shares to existing shareholders, which increases outstanding shares but does not dilute ownership. Stock splits reduce the par value of shares to increase the number of outstanding shares, leaving shareholders' total funds unchanged. Both bonus shares and splits can signal higher future profits and dividends. While bonus shares transfer reserves to paid-in capital, splits do not change equity balances but alter the par value.

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Shreyansh Dabhadiya
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52 views10 pages

E.D Bonus Issues & Stock Splits

This document discusses bonus shares and stock splits. It defines bonus shares as the distribution of free shares to existing shareholders, which increases outstanding shares but does not dilute ownership. Stock splits reduce the par value of shares to increase the number of outstanding shares, leaving shareholders' total funds unchanged. Both bonus shares and splits can signal higher future profits and dividends. While bonus shares transfer reserves to paid-in capital, splits do not change equity balances but alter the par value.

Uploaded by

Shreyansh Dabhadiya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Bonus Issues & Stock Splits

Dr. Upma Paliwal


Introduction to Bonus Shares
• The issue of bonus shares is the distribution of shares
free of cost to the existing shareholders
• Issuing bonus shares increases the number of
outstanding shares of the company.
• The bonus shares are distributed proportionately to
the existing shareholder. Hence there is no dilution of
ownership.
• The declaration of bonus shares will increase the paid-
up share capital and reduce the retained earnings
(reserves & surplus).
• It is merely a transfer from one account to another.
Advantages of Bonus Shares
3

 To shareholders:
 Tax benefit
 Indication of higher future profits
 Future dividends may increase
 Psychological value
 To company:
 Conservation of cash
 Only means to pay dividend under financial difficulty
and contractual restrictions
 More attractive share price
Limitations of Bonus Shares
4

 Shareholders’ wealth remains unaffected


 Costly to administer
Share split
5

A share split is a method to increase the number of


outstanding shares through a proportional reduction
in the par value of the share. A share split affects
only the par value and the number of outstanding
shares; the shareholders’ total funds remain
unaltered.
Example
6

 The following is the capital structure of Walchand Sons


& Company:

 Walchand Company split their shares two-for-one. The


capitalization of the company after the split is as follows:
Bonus Share vs. Share Split
7

 The bonus issue and the share split are similar except
for the difference in their accounting treatment.
 In the case of bonus shares, the balance of the
reserves and surpluses account decreases due to a
transfer to the paid-up capital and the share premium
accounts. The par value per share remains unaffected.
 With a share split, the balance of the equity accounts
does not change, but the par value per share changes.
Reasons for Share Split
8

 To make trading in shares attractive


 To signal the possibility of higher profits in the
future
 To give higher dividends to shareholders
Reverse Split
9

 Under the situation of falling price of a company’s share, the


company may want to reduce the number of outstanding
shares to prop up the market price per share.

 The reduction of the number of outstanding shares by


increasing per share par value is known as a reverse split.

 The reverse split is generally an indication of financial


difficulty, and is, therefore, intended to increase the market
price per share.
 Thank You

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