Fundamentals of Financial Management, Third Edition

17.4 BONUS SHARES

Usually dividend is paid in form of cash. Cash dividend is liked by those shareholders who attach greater importance to supplementing their current income with dividends. When cash dividend is paid, reserves fall to a corresponding extent, and this may endanger the cash position of the firm. Thus in view of the limitations of cash dividend, dividend is also paid in form of shares, these are known as bonus shares in India and stock dividend in many other countries.

17.4.1 Impact of the Bonus Issue

Let us begin with an example how the face of the balance sheet changes after the issue of bonus shares but the company’s net worth as well as the shareholders’ wealth remain unchanged. Suppose Company A has 10,000 shares of Rs 1 each, ...