Which of the following statements about a bonus issue is NOT true?
A) Shareholders will only gain if the market value of the combined shares is greater than it was before the bonus issue.
B) Total shareholders' equity remains constant.
C) The total value of the firm must increase.
D) If a shareholder owned 10% of the company before the bonus issue,she or he would still own 10% after the bonus issue.

Question

Quizplus · Accepted Answer

The statement "The total value of the firm must increase" is not true. A bonus issue does not necessarily increase the total value of the firm. It merely increases the number of shares outstanding, resulting in a decrease in the market price per share. Total shareholders' equity remains constant because the bonus issue is a capitalization of reserves, which means that the company is converting its reserves into share capital without increasing the total amount of equity. Shareholders who owned a certain percentage of the company before the bonus issue will still own the same percentage after the bonus issue because the increase in shares is proportional to their existing shareholding. Whether shareholders will gain or not depends on the market's reaction to the bonus issue and the overall performance of the company.

Which of the Following Statements About a Bonus Issue Is