Question

If a company issues bonus shares, what is the most likely effect on its debt-equity ratio?

Answer 1

Answer:

If a company issues bonus shares, there will be no increase in the capital and the debt-equity ratio remains unchanged.

Step-by-step explanation:

Free additional shares offered to existing shareholders is known as a bonus issue.

Bonus issues are given to shareholders when companies are short of cash and shareholders expect a regular income. It may also be issued to restructure company reserves.

However, issuing bonus shares does not involve cash flow. It increases the company’s share capital but not its net assets.

Since bonus issues only increase the number of shares a shareholder is holding but not the ratio/percentage of holding. Thus, if a company issues bonus shares, there will be no increase in the capital and the debt-equity ratio remains unchanged.