ECONOMICS
FINANCIAL MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increases the profit made by the company
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Increases the EPS
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Decreases the EPS
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Reduces the free float of the company
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Detailed explanation-1: -After a bonus issue, though the number of shares held by an investor increases, his proportional ownership of the company’s shares does not change. As the number of outstanding shares of the company increases, its earnings per share (EPS) declines.
Detailed explanation-2: -The bonus issue simply means the issue of new shares to the existing shareholders without the corresponding increase in cash. Therefore, we need to adjust the number of ordinary shares before the event and also, restate the EPS for previous year: EPS in 20X3 = CU 30 000/240 000 = CU 0.125/share.
Detailed explanation-3: -Both bonuses and stock splits may increase the amount of shares held by investors at any given point in time. However, it is vital to remember that while bonus shares and stock splits increase the number of shares, they also decrease the market price of shares.
Detailed explanation-4: -An increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared. Consider this example: If you’ve bought one share for ₹1, 000 and the company declares a 1:1 bonus, it means that you will now get 1 free share for every 1 share you own.