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Which of the following is the most likely effect of a scrip issue of shares?
A. Decreases the debt/equity ratio of the company
B. Decreases earnings per share
C. Increases the share premium account
D. Increases the share priceI was wondering between options A and B. The correct answer is B. When issuing scrip shares, share capital of the company would increase. This increase in share capital with no new funds raised would decrease gearing and EPS. So can you please explain why option A is not chosen?
Thank you in advance,
Iniss.A 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 A is wrong – the gearing will not change;
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).
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