Does the Company's Value Increase With the Issuance of Bonus Shares?
Defining Bonus Shares
Bonus shares refer to an additional issuance of shares by a company to its existing shareholders. These shares are issued without requiring any additional consideration from the shareholders.
Issuance of Bonus Shares
The issuance of bonus shares increases the number of shares outstanding but does not affect the company's share capital or market capitalization.
Impact on Company Value
Contrary to some assumptions, the issuance of bonus shares does not directly increase a company's value.
Instead, a bonus issue reallocates the company's value across a larger number of shares, resulting in a reduction in the share price.
The total market capitalization, which represents the value of all outstanding shares, remains unchanged after a bonus issue.
Purpose of Bonus Shares
Companies may issue bonus shares for various reasons, including:
- Rewarding shareholders for loyalty and support
- Enhancing liquidity and accessibility of shares
- Realigning the share price to make it more attractive to investors
However, it's important to note that while bonus shares can impact share price and liquidity, they do not directly increase a company's underlying value.
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