CA Inter P6 · Chapter 8 · Question 7 of 8
When a company issues fully paid bonus shares to its equity shareholders out of free reserves, the effect is that:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Paid-up share capital increases and reserves decrease, with no change in total shareholders' funds
Explanation
A bonus issue capitalises reserves. Free reserves are transferred to share capital, so the components of shareholders' funds change but the total does not. No cash leaves the company. Each shareholder receives shares in proportion to existing holdings, so proportionate ownership is unchanged.
More Dividend Decision MCQs
- Q1Kamal Ltd has EPS of ₹ 12 and pays a dividend of ₹ 4 per share. Its internal rate of return is 18% and the equity capitalisation rate is…
- Q2According to Walter's model, if a firm's internal rate of return (r) is greater than its cost of equity (Ke), the optimum dividend payout…
- Q3Using Gordon's model, a firm has EPS of ₹ 15, retains 40% of earnings, earns 12% on investments and has a cost of equity of 14%. The price…
- Q4The current market price of an equity share is ₹ 100 and the equity capitalisation rate is 12%. The company expects to declare a dividend…
- Q5Under the Modigliani-Miller approach, a company with 2,00,000 equity shares expects net income of ₹ 20,00,000 for the year and plans new…