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sir in june 2011 f9 paper q3(c)
it is written that scrip dividend will help in reducing gearing as it involves new issue of share, however the new issue of shares do not lead to any cash flow and only tranfer of reserve into share capital then how gearing is reduced?Scrip dividends can help in reducing gearing because they involve the issuance of new shares to shareholders instead of a cash dividend. While it is true that the new issue of shares does not lead to any cash flow, it does result in a transfer of reserves into share capital.
This means that the equity (share capital plus reserves) remains the same, but the gearing ratio is reduced because the total long-term debt is divided by a larger equity base. Therefore, the gearing ratio, which is the ratio of long-term debt to long-term debt plus equity, decreases when a scrip dividend is issued.
But sir how a larger equity base?
The transfer from reserve to equity cannot change the total equityAnd sir equity in calculating financial gearing includes ordinary shareholders fund and reserves
A scrip div – new issue of shares means larger equity base
It does not lead to any cash flow, it does result in a transfer of reserves into share capital.
This means that the equity (share capital plus reserves) remains the same.Therefore, the gearing ratio, which is the ratio of long-term debt to long-term debt plus equity, decreases when a scrip dividend is issued.
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