Explain bonus or capitalisation issues, Financial Accounting

Assignment Help:

Q. Explain bonus or capitalisation issues?

A rights issue is a approach of raising finance via the issue of shares to existing equity shareholders. Consecutively to make such an issue a company must have an authorised share capital which exceeds the issued share capital. Companies select to make rights issues for the reason that of a need to raise long term finance and a decision that such a method is the most cost effective or desirable. The finance increased may be used to fund any type of long term investment such as an acquisition expansion of production facilities or overseas investment.

A scrip issue is an issue of shares for which no charge is made. The shares are issued at no cost to existing shareholders and may be called bonus or capitalisation issues. The benefit of a rights issue made to existing investors as opposed to an issue via public subscription is that such investors are assumed to already have some level of commitment to the company. Since such it may prove relatively easy to persuade them to buy shares and certainly easier and less costly than making a public offering. It is though important for the company to explain the reason behind the share issue - what it is going to do with the cash raised. If an investor is to be convinced to pay cash for additional shares then it must be demonstrated that their newly invested cash will be used to earn returns at least equal to those they are currently receiving from their investment. If the return on capital is likely to decline in the company after the rights issue then the issue is unlikely to be successful. Since with any new share issue it is common practice for a rights issue to be underwritten.

The solitary investor in a company which is making a rights issue will be invited to take up or sell his/her rights. If the rights are occupied then the investor will have to make a payment to the company equal to the price of the rights purchased. On the other hand the investor may choose not to increase the scale of his investment and sell the right on the open market. In a proficient market the investor is no better nor no worse off because of choosing to sell his/her rights.

Scrip issues are frequently justified on the basis that there is a need to increase the number of shares in issue in order to bring down the price per share. It is frequently argued that the market 'dislikes' shares which individually have a very high price and by increasing the number of shares in issue the unit share price can be diluted. This is able to be beneficial to shareholders because research evidence suggests that the drop in the unit share price isn't as great as the proportionate change in the number of shares in issue. For instance if 10 million shares are in issue and the current market price is $10 each the market value of the equity is $100 million.

If 10 million shares are at the present distributed via a scrip issue one would expect the share price to drop to $5 leaving the overall equity value at $100 million. The post issue price patch up at say $6. This results in a raise in the value of individual shareholdings together with a rise in the total value of the equity. Individual investors may thus experience some capital gain from a scrip issue. While making a scrip issue a company is converting some of the reserves into share capital and the number of shares (fully paid up) to which an investor is entitled will be expressed in relation to the current holding example a 2 for 5 issues. As previously suggested although the private investor gains no theoretical advantage from this conversion of reserves, there may be a advantage in practice because the shares are now more marketable.


Related Discussions:- Explain bonus or capitalisation issues

Balance sheet, Is there two type of way to do balance sheet?

Is there two type of way to do balance sheet?

Determine the types of hedging , Go to your assigned corporation's website ...

Go to your assigned corporation's website and access their latest annual report. Answer the following questions regarding their derivative and foreign currency transactions. 1.

Consequences of adjudication-adjudication of debtor, Consequences of adjudi...

Consequences of adjudication The consequences of the making of the adjudication order are: 1. The order must be advertised in the gazette and a local paper; 2. The ownershi

Acquisition Project , Do you have anyone on staff that understands acquisit...

Do you have anyone on staff that understands acquisition accounting procedures?

What are the various strategies about bond, What are the various strategies...

What are the various strategies behind selected low (e.g., zero) or high coupon rates when issuing bonds?

Companys deduction related to limited expensing, In May of 2010, a business...

In May of 2010, a business placed in service $35,000 of property eligible for limited expensing under §179. Line 13 of Form 4562 for 2009 was $15,000. Net income before cost recove

Accounting for PPE, Acquisition of Assets: The cost method of accounting is...

Acquisition of Assets: The cost method of accounting is used for the initial recording of all acquisitions of assets controlled by the authority. Cost is determined as the fair val

Present value of an uneven series, In actual life cash flows occurring abov...

In actual life cash flows occurring above a period of time are frequently uneven. For illustration, the dividends declared through the companies will change from year to year, as s

Estimate the systematic risk of the new investment, Q. Estimate the systema...

Q. Estimate the systematic risk of the new investment? The beta of the comparator company will be utilized to estimate the systematic risk of the new investment. No un-gearing

Accounts required and their purpose-branches, Accounts required and their p...

Accounts required and their purpose a. Branch Current Account (Head Office Books) Records all transactions branch and head office; The balance represents the investmen

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd