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Good evening Mr John…One common us of the share premium is to finance the issue of bonus shares…
The question is what’s the purpose of this..
Only shareholders can benefit by collecting free shares and selling them in the future …Is it?
Thank you..I will explain the reason, but the reason isn’t really examinable until Paper F9 🙂
Bonus shares will not make shareholders worth any more in total (because they are given free). What will happen is that they will have more shares but each share will actually be worth less than before – but in total they will be worth the same.
However, generally people don’t like it when share prices get very high. So when share prices get very high companies often have a bonus issue which make the price of each share lower, without affecting the total value of the shareholders shares (because they have more of them).
Again, it is not something to worry about for F3 – it is in Paper F9 that it becomes more important.
Ok, But I can’t see this in examples…How is it making each share lower?
Let’s say I have 5 shares which nominal values are 1$ and in equity section there’s share premium worth of 50$.We’re given 1 for 5 and I will have 6 shares each worth 1$ because this amount withdrawn from share premium …As a result, Share Capital will be higher and share premium lower…In the end I will end up with 1 extra share worth of 1$ …..Can you show this with a simple example ….Please….Thank you Mr John…
I am talking about the market value of the shares (the value on the stock exchange, which is different from the value in the Statement of financial position).
For examples you need to look at the Paper F9 lectures – it is not relevant for Paper F3.Let’s say it’s like you said but how? How is the market value affected by this?
Could you explain this with a simple example , please ….Thank you..Suppose at the moment you have 100 shares and the value on the stock exchange is $5 per share, and so you are worth $500.
Suppose the company has a 1 for 1 bonus issue. You now have 200 shares. However you have not paid any more money into the business and so you cannot be worth any more than before. So each share will now be priced at $2.50 on the stock exchange.
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