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Sources of Finance – Equity – ACCA Financial Management (FM) part 2

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    • With a bonus issue, if there are 10,000 shares with a nominal value of $1 per share then if they have a 1 for 1 bonus issue there are then 20,000 shares with a nominal value of $1 per share (and as you will remember from Paper FA, the extra 10,000 is transferred from the reserves to share capital).

      With a stock split, then if there are 10,000 shares with a nominal value of $1 per share, then with a stock split they might cancel the existing shares and replace them with 20,000 shares with a nominal value of $0.50 per share (and this time there is no transfer needed from reserves).

      However what matters in financial management is that in both cases the shareholders end up with more shares but in both cases the market value per share is reduced (halved in the examples above) and so the wealth of each shareholder remains unchanged.

  3. Sir how is scrip dividend different to bonus issue? when we issue scrip dividend does our amount($) in our portfolio increases where as issue of bonus shares had no effect in the amount($). What about market price? in bonus and stock split it reduces what about scrip dividend? Thank you sir

    • In the case of a scrip dividend, shareholders are given the choice of taking the dividend in cash or taking extra shares instead. It makes no difference to the ‘wealth’ of the shareholder – they either have the same number of shares that they had before plus the cash that they received, or (if they take the dividend as shares) they have more shares but do not have the extra cash.

  4. Sir John regarding stock split will there be price adjustment to the market price or is it just the par value that changes in stock split? if the latter is true then is this the key difference between bonus and stock split?

    • The market price will change in both cases. With a stock split, the nominal value per share changes (and so the total nominal value stays the same). With a bonus issue the nominal value per share stays the same and so the total nominal value increases (which necessitates a transfer from reserves, but this is basic accounting from Paper FA).

  6. Hi John,

    With Scrip divs would the company buy the shares for the shareholders on an exchange? If they did this this wouldn’t be a source of new finance. Or would the company issue new share to shareholders as a scrip div, and the value of the shares would decrease proportionally. By doing either, wouldn’t the company be better off just not paying the script div and just keeping the cash from earning and reinvest within the business?

    Thank you

    • With a scrip dividend, the company issues new shares. That means the company can keep the cash they would otherwise have had to pay and use it to expand the business. Although there are more shares in issue (which would reduce the value per share if the earnings stayed the same), the fact that the company is able to expand should make the shares worth more.

      • Thanks John.

        Im just trying to figure out the advantages and disadvantages of a script div over the company retaining the earnings. It just a way of the company making the shares more marketable as you mentioned with stock splits?

      • No. Usually the shareholders are individually given the choice of taking the dividend as cash or taking it as shares. If they take shares then as I wrote before, the market value per share will not fall and so their shareholding in total will be worth more. If they need the cash then they take the cash instead.

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