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Questions and Answers
What is the key difference between a rights issue and a bonus issue of shares?
What does a 1:1 bonus ratio indicate?
What is the effect of a bonus issue on the total share capital of a company?
What is the main difference between a bonus issue and a stock split?
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What happens to the par value of each share in a stock split?
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How does a bonus issue affect a company's equity capital?
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Study Notes
Bonus Issue of Shares
A bonus issue of shares is a corporate action where a company distributes additional shares to its existing shareholders without any consideration, thereby increasing the total number of shares outstanding.
Rights Issue vs. Bonus Issue
- A rights issue is an offer to existing shareholders to purchase additional shares in proportion to their existing holdings, usually at a discounted price.
- A bonus issue, on the other hand, is free and does not require shareholders to pay anything.
Bonus Ratio
- The bonus ratio indicates the number of new shares issued for each existing share held.
- For example, a 1:1 bonus ratio means one new share is issued for every one existing share.
Impact on Share Capital
- A bonus issue increases the total share capital of the company, as the number of shares outstanding increases.
- The par value of each share remains the same, but the total share capital increases.
Equity Capital
- A bonus issue does not affect the company's equity capital, as it is merely a rearrangement of the existing equity base.
- The total equity capital remains the same, but it is spread over a larger number of shares.
Stock Splits
- A stock split is similar to a bonus issue, but it does not increase the total share capital.
- In a stock split, the par value of each share is reduced, and the number of shares outstanding is increased proportionately.
Key differences between a bonus issue and a stock split:
- A bonus issue increases the total share capital, whereas a stock split does not.
- A bonus issue does not affect the par value of each share, whereas a stock split reduces the par value.
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Description
Learn about the concept of bonus issue of shares, its differences with rights issue and stock splits, and its impact on share capital and equity capital. Explore the bonus ratio, its effects on total share capital, and how it differs from stock splits.
