The effect of a bonus issue to all shareholders on (a)net asset backing per share,(b)each shareholder's share of net assets and (c)market capitalisation is:
A) (a) The net asset backing per share will decrease; (b) each shareholder's share of net assets will remain the same; (c) evidence suggests that on average the market capitalisation will increase.
B) (a) The net asset backing per share will increase; (b) each shareholder's share of net assets will increase; (c) evidence suggests that on average the market capitalisation will remain the same.
C) (a) The net asset backing per share will decrease; (b) each shareholder's share of net assets will decrease; (c) evidence suggests that on average the market capitalisation will remain the same.
D) (a) The net asset backing per share will remain the same; (b) each shareholder's share of net assets will decrease; (c) evidence suggests that on average the market capitalisation will decrease.

Question

Quizplus · Accepted Answer

A bonus issue increases the number of shares outstanding without any change in the company's assets, so the net asset value per share will decrease. Each shareholder's share of net assets will remain the same since their proportionate ownership in the company hasn't changed. However, evidence suggests that the market capitalisation will increase because a bonus issue is seen as a positive signal to investors since it reflects the company's ability to distribute profits without affecting the underlying business.

The Effect of a Bonus Issue to All Shareholders on (A)net