B Com Exam > B Com Videos > Business Economics & Finance > Bonus Shares - Dividend Policy, Business Economics & Finance
Bonus Shares - Dividend Policy, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com
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FAQs on Bonus Shares - Dividend Policy, Business Economics & Finance Video Lecture - Business Economics & Finance - B Com
| 1. What are bonus shares in relation to dividend policy? |  |
Ans. Bonus shares, also known as scrip dividends, are additional shares given to existing shareholders by a company, free of charge. These shares are issued in proportion to the number of shares owned by each shareholder and are distributed as a form of dividend. Bonus shares are often issued when a company has accumulated sufficient reserves and wants to reward its shareholders without distributing cash dividends.
| 2. How do bonus shares affect the dividend policy of a company? | |
Ans. Bonus shares can have an impact on the dividend policy of a company. When bonus shares are issued, the total number of outstanding shares increases without any change in the company's earnings or cash position. As a result, the earnings per share (EPS) and dividend per share (DPS) decrease. However, the overall value of the shareholders' investment remains the same as the additional shares compensate for the decrease in DPS. The dividend payout ratio, which is the proportion of earnings distributed as dividends, also decreases with the issuance of bonus shares.
| 3. What are the reasons for a company to issue bonus shares? | |
Ans. There are several reasons why a company may choose to issue bonus shares:
1. Conservation of cash: By issuing bonus shares instead of cash dividends, a company can conserve its cash resources for other purposes such as expansion or investment opportunities.
2. Enhancing liquidity: Bonus shares increase the number of outstanding shares, which can improve the liquidity of the company's stock in the market.
3. Rewarding shareholders: Issuing bonus shares allows a company to reward its existing shareholders without the need for cash outflow, thereby enhancing investor confidence and loyalty.
4. Positive signal to the market: The issuance of bonus shares can indicate that a company is performing well and has accumulated sufficient reserves, which may attract more investors.
| 4. How are bonus shares accounted for in a company's financial statements? | |
Ans. Bonus shares are accounted for in a company's financial statements by adjusting the share capital and reserves. The number of shares outstanding is increased, which affects the share capital section of the balance sheet. The reserves section is also adjusted to reflect the transfer of retained earnings or other reserves to share capital. The accounting treatment ensures that the issuance of bonus shares does not impact the overall net worth of the company.
| 5. What are the tax implications of receiving bonus shares? | |
Ans. In most jurisdictions, receiving bonus shares is not considered taxable income for shareholders. This is because no cash or equivalent value is received. However, the cost basis of the original shares is adjusted to reflect the additional shares received. When the bonus shares are eventually sold, the capital gains tax will be calculated based on the adjusted cost basis. It is important for shareholders to consult with a tax professional or refer to their local tax regulations for specific guidance on the tax implications of receiving bonus shares.
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Dec 23, 2024 Last updated |
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