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Dear tutor ,
I have some enquiries to make. I have searched online and try to get more info but i still stucked somewhere on bonus share issues.
Giving examples on : shareholders hold 100 shares. Company is issuing bonus issue with ratio of 1:2 . Meaning the s/hilders holding 300 shares of the company. This will dilute the eps. My question/doubt is = how does the issuance of bonus shares help the company for financing since the company issuingbonus shares from say: shares premium ? I am standing on both company and s/holders perspectives.
Shareholders will be getting still the same amount of dividends since the numbers of shares they hold are the same .
I would assume that the company will have no benefits by giving out bonus issues ?
Sorry if i understand correctly and i need help to my stucked brain , thanks !
Where a bonus issue of 1 for 2 is made, and our shareholders already hold 100 shares, then for each 2 that they hold they will be given 1 more free bonus share.
In your illustrative figures, the shareholders would receive 50 and not the 200 that you have suggested.
If we start with a statement of financial position that shows:
Share capital. 100
Share premium 70
Retained earnings. 30Net assets. 200
And we make a 1 for 2 bonus issue financed by the use of the sahre premium account balance, the new statement of financial position will read
Share capital. 150
Share premium. 20
Retained earnings. 30Net assets. 200
Another way of designating Net Assets is to call that figure Shareholders’ Funds
The number of shares held by individual shareholders is NOT the same!
The amount of dividend paid out will vary dependent upon availability of retained earnings and also funds from which to pay
The issue of bonus shares helps the company financially in NO WAY. No cash changes hands.
Better?
Now, ask yourself, by how much has shareholders’ funds changed?
Dear Mr Mike ,
Thanks for the illustrations and detail explanation , appreciate that!!
Able to understand more with the illustration .However , with this , what does the bonus issue benefit the Company ? Or is the bonus issue benefits the shareholders ? I cant see what is the benefits of having bonus share issues (Either for investor or company) to have other than letting the shareholders to own more shares , on the other hand also bring down the EPS, etc.
Why i mentioned above is because -which i tried to udnerstand more from Google articles , many of them tend to practise this bonus issue as a “Reward” for the shareholders .
While i am trying to think more in depth with the accounting treatments….looks like it does not give any goods ?
My mind headed two directions :
1) WIth more shares ,they may get more dividends payout (Assuming the company is performing)
2) On the other hand , with more shares, the earning per share also reduces , so…..Please enlighten me . If you have any articles you could share with me also ??
Thank you !!
You’re right ….. to a degree. There is no tangible benefit for the company nor particularly one for the shareholders.
The value of an individual shareholder’s investment should remain the same as before the bonus issue
So the question remains “Why bother with bonus issues!”
So far as the company is concerned the financing of a bonus issue through the share premium account tidies up (to an extent) the statement of financial position (Dr Share Premium Account Cr Share Capital Account). In this way the company can eliminate the share premium account by converting that value into equity shares.
So far as shareholders are concerned there’s a “nice” feeling about owning more shares that you previously owned at no cost to the individual shareholder.
There is a further advantage. As a natural consequence of the bonus issue, the market price of the shares will decrease and that makes them more attractive to buy for the small investor (You get more shares for your $100 to invest)
Better?
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