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Which of the following statements is true of a scrip issue with perfect information?
A Decreases earnings per share
B Decreases the debt/equity ratio (calculated on a market value basis) of the company
C Increases individual shareholder wealth
D Increases the market price of the shareI understood the reason why A is the answer
Sir can u pls explain why B,C and D are not
Kindly ellaborate..Thank youA scrip issue will mean that shareholders have more shares, but the MV per share will be lower. The total market value of all the shares will, in theory, remain the same.
Therefore B is wrong – the gearing will not change; C is wrong – the total wealth (total value of the shareholding) will be unchanged; D is wrong – the MV per share will be lower.
A scrip issue is just giving shareholders free shares. It does not affect the value of the company at all (the value of the company only increases if they either raise more money or earn more money). There is no reason whatsoever therefore why the total market value of the company should change. All that happens is that there are more shares in issue, but the market value per share is lower (so that, in a perfect world, the total value of a shareholders investment will not change).
I assume that you have watched my free lectures on rights issues. Have a go at repeating one of the examples with an issue price of zero (which is then effectively a bonus issue) and see what happens to the new share price 🙂
So to conclude- In bonus issue and right issue shareholders wealth will remain unchanged?
Kindly correct me if im wrong
Also..we wont be asked to prove the above statement right?Sir i watched ur lecture on bonus and right issue..and now im conceptually clear!
Thanks a lot
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