Bonus vs Split or Bonus=Split2
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Locally we call them bonus; internationally it is called a stock split. They both mean the same. A stock split (bonus) simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in NO WAY affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting. A typical example is a 2-for-1 stock split. A company will announce that it's splitting its stock 2for-1 in one month. One month from that date, the company's shares (having traded the day before at, say, Rs.30) will now be trading at half the price from the previous day (so they'll open at Rs.15). The company, which had 10 million shares outstanding, now consequently has 20 million shares outstanding. The price has been halved in order to accommodate a doubling of the share total. Why would a company do a stock split (bonus)? Few reasons, first, as a stock price skyrockets, some people will be psychologically unwilling to pay that "high price" so a stock split brings the shares down to a more "attractive" level. Again, the intrinsic value has NOT changed, but the psychological effects may help the stock. Second, a stock split generally occurs in the face of new highs for the stock. Thus, it's an event dripping with positive connotations and associations . . . it's makes bulls snort and roar to suddenly have "twice as many shares" as they started with, for example. Third, and final, with lower-priced shares, a stock's LIQUIDITY increases, often reducing the BID/ASK SPREAD and making it easier to trade. This is always good.
As the price of the scrip after 1:1 bonus, well, since the floating stock will double ... and the market cap remains unchanged ... the price ex-bonus will immediately halve. Of course, depending on the market trends on that day and subsequent, it may continue rising or falling in continuation of the momentum it showed before the ex bonus date. So in reality it will not be exactly half of the cum bonus price, but nearly so. Example Arun co is an onion trading firm, i.e. it buys onions from farmers and sells it to wholesalers. The firm’s balance sheet and profit and loss statement for the past 5 years are down below. The firm is considering a bonus or stock split, so the owner Arun calls up on his friend Varun to discuss about it and you, a financial analyst, listening to this. So, let’s listen to this conversation between Onion Trader and his friend. A for Arun, V for Varun and F for Financial Analyst
A: Hi, as I was telling you I want to know which is better Bonus issue or Stock Split. V: all right let’s analyze it. A: here is the BS “balance Sheet” V: hmm... 1st year A: yeah, in the first year I issued 100,000 lakh shares, at a price of 50rs. V: What is the Face Vale of a share? A: 10 V: hmm... Share Price = Face Value + Premium If Face Value is going to be 10rs as you issued, then Premium is Share Price = Face Value + Premium Premium = Share Price – Face Value Premium = 50rs – 10rs Premium = 40rs So we have risen… 10rs * 100,000 + 40rs*100,000 = 10, 00,000rs + 40, 00,000rs In total 50, 00,000rs A: so the BS looks like this Asset = Capital + Liabilities Capital = 10rs * 100,000 + 40rs*100,000
Let’s put this under two account types, one is Paid-up Capital which is nothing but face value of a share * no: of shares issued by the firm. Paid-up Capital= Face value of a share * no: of shares Paid-up Capital=10rs*100,000 Paid-up Capital=10, 00, 000rs Then let’s put the premium i.e. 40rs per share into another account called Premium account. Premium account=Premium collected on per share* no: of shares Premium account=40rs*100,000 Premium account=40, 00, 000rs So, now we can call the capital account as summation of Paid-up capital or share Paid-up capital and Premium capital or Share Premium capital Capital= Share Paid-up capital+ Share Premium capital Capital = 10rs*100,000 + 40rs*100,000 Capital=50, 00,000rs Now the Financial Analyst drops in and assists them out on solving the problem. F: All right lets do this calculation in two ways now from firm’s perspective and next on shareholder’s perspective. V: ok, now the BS looks like this Capital Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
F: Reserves consist of accumulated profits i.e. the summation of all those profits you have made for your business for all these years right? A, V: Yeah F: Ok, if you are issuing bonus share say 1:1 then for every share you are issuing another share, Right?
A, V: Yeah F: Then you are going to issue 100,000 new shares to the firm right? A, V: Yeah F: Are you changing the Face Value of the firm? A, V: No F: Then, would there be change in the face value of your company after the Bonus issue? A, V: No F: All right so in this case all you have to do is give 100,000 new shares to your existing share holders. A, V: Yep F: So if Face Value doesn’t change then you are going to give these new 100,000 shares at the same Face Value 10rs A, V: so the Paid-up capital will be increased by this new amount 10rs (the face value) *100,000 (new shares) 10, 00,000rs Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
A, V: Ok, what happened to Premium account then?
F: all right, what is the current market price of your share? A, V: 100rs F: if you are issuing the new shares (100,000) at the face value of 10rs what is the share premium then? V: Yeah it is Share Price = Face Value of a Share + Premium of a Share So here, Share Price =100rs Face Value of a Share=10rs Then Share Price = Face Value of a Share + Premium of a Share Share Price - Face Value of a Share = Premium of a Share 100rs-10rs=90rs A, V: all right we got it. So now the Share premium Capital account will increase to the tune of 40rs*100,000 + 90rs*100,000 A, V: when we issued the shares initially we issue it at 50rs where in Face value is 10rs and Premium is 40rs but now the Face Value is the same 10rs but Premium is 90rs as I can issue the stock price only at the current price and not at the then issue price. F: perfect, so can you show the effect on this in BS A, V: Here we go… Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue
Share Paid-up capital
10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
F: You are right but what happens to your Reserves account A, V: Oh yeah, it got to decrease by that new amount, as I am using that money in the reserves for this purposes. F: Yeah, this is called Capitalization of Reserves. A, V: ok here we go. Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital So this turned in to After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares) 1, 00, 00,000rs – (10rs *100,000 + 90rs*100,000) 1, 50, 00,000rs
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital 0 1, 50, 00,000rs Final after or Ex-Bonus issue Statement Share Paid-up capital 20, 00,000rs
Share Premium capital 1, 30, 00,000rs Reserves Total capital 0 1, 50, 00,000rs
So, the total capital still remains the same. A, V, F: Right! What happens in the case of Stock Split? A, V: The stock splits in the ratio we split, and there is no effect in the BS. Say in case of 2 stocks split the 100,000 shares is split into another 100,000 shares, in total we will have 200,000 shares. So, the Market Capitalization i.e. Market Price of a Share * Number of Shares remains the same as the stock is split in two and each of this has one half of the original market value. So, 100,000 * 100 = 1, 00, 00,000rs (So, I will have to pay 1cr as of now to buy all the equity shares of the firm) 100,000 turn in to 200,000 shares and since the Market Cap is going to be the same 1cr then the price of a share after Stock Split is Market Capitalization =. Market Price of a Share * Number of Shares 1, 00, 00,000rs = Market Price of a Share * 200,000 shares Market Price of a Share = 1, 00, 00,000rs / 200,000 shares Market Price of a Share =50rs A, V, F: That’s great… Now the question asked to readers or upcoming financial analyst is 1. Analyze if this Arun co. gives 1:1 bonus first and 1:1 stock split. 2. Analyze if this Arun co. gives 1:1 stock split and 1:1 bonus first. 3. Find out which kind of process cash more money out of firms cash box, either bonus first and stock split next or stock split first and bonus next. Please do validate this with numbers.
As the price of the scrip after 1:1 bonus, well, since the floating stock will double ... and the market cap remains unchanged ... the price ex-bonus will immediately halve. Of course, depending on the market trends on that day and subsequent, it may continue rising or falling in continuation of the momentum it showed before the ex bonus date. So in reality it will not be exactly half of the cum bonus price, but nearly so. Example Arun co is an onion trading firm, i.e. it buys onions from farmers and sells it to wholesalers. The firm’s balance sheet and profit and loss statement for the past 5 years are down below. The firm is considering a bonus or stock split, so the owner Arun calls up on his friend Varun to discuss about it and you, a financial analyst, listening to this. So, let’s listen to this conversation between Onion Trader and his friend. A for Arun, V for Varun and F for Financial Analyst
A: Hi, as I was telling you I want to know which is better Bonus issue or Stock Split. V: all right let’s analyze it. A: here is the BS “balance Sheet” V: hmm... 1st year A: yeah, in the first year I issued 100,000 lakh shares, at a price of 50rs. V: What is the Face Vale of a share? A: 10 V: hmm... Share Price = Face Value + Premium If Face Value is going to be 10rs as you issued, then Premium is Share Price = Face Value + Premium Premium = Share Price – Face Value Premium = 50rs – 10rs Premium = 40rs So we have risen… 10rs * 100,000 + 40rs*100,000 = 10, 00,000rs + 40, 00,000rs In total 50, 00,000rs A: so the BS looks like this Asset = Capital + Liabilities Capital = 10rs * 100,000 + 40rs*100,000
Let’s put this under two account types, one is Paid-up Capital which is nothing but face value of a share * no: of shares issued by the firm. Paid-up Capital= Face value of a share * no: of shares Paid-up Capital=10rs*100,000 Paid-up Capital=10, 00, 000rs Then let’s put the premium i.e. 40rs per share into another account called Premium account. Premium account=Premium collected on per share* no: of shares Premium account=40rs*100,000 Premium account=40, 00, 000rs So, now we can call the capital account as summation of Paid-up capital or share Paid-up capital and Premium capital or Share Premium capital Capital= Share Paid-up capital+ Share Premium capital Capital = 10rs*100,000 + 40rs*100,000 Capital=50, 00,000rs Now the Financial Analyst drops in and assists them out on solving the problem. F: All right lets do this calculation in two ways now from firm’s perspective and next on shareholder’s perspective. V: ok, now the BS looks like this Capital Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
F: Reserves consist of accumulated profits i.e. the summation of all those profits you have made for your business for all these years right? A, V: Yeah F: Ok, if you are issuing bonus share say 1:1 then for every share you are issuing another share, Right?
A, V: Yeah F: Then you are going to issue 100,000 new shares to the firm right? A, V: Yeah F: Are you changing the Face Value of the firm? A, V: No F: Then, would there be change in the face value of your company after the Bonus issue? A, V: No F: All right so in this case all you have to do is give 100,000 new shares to your existing share holders. A, V: Yep F: So if Face Value doesn’t change then you are going to give these new 100,000 shares at the same Face Value 10rs A, V: so the Paid-up capital will be increased by this new amount 10rs (the face value) *100,000 (new shares) 10, 00,000rs Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
A, V: Ok, what happened to Premium account then?
F: all right, what is the current market price of your share? A, V: 100rs F: if you are issuing the new shares (100,000) at the face value of 10rs what is the share premium then? V: Yeah it is Share Price = Face Value of a Share + Premium of a Share So here, Share Price =100rs Face Value of a Share=10rs Then Share Price = Face Value of a Share + Premium of a Share Share Price - Face Value of a Share = Premium of a Share 100rs-10rs=90rs A, V: all right we got it. So now the Share premium Capital account will increase to the tune of 40rs*100,000 + 90rs*100,000 A, V: when we issued the shares initially we issue it at 50rs where in Face value is 10rs and Premium is 40rs but now the Face Value is the same 10rs but Premium is 90rs as I can issue the stock price only at the current price and not at the then issue price. F: perfect, so can you show the effect on this in BS A, V: Here we go… Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue
Share Paid-up capital
10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs
F: You are right but what happens to your Reserves account A, V: Oh yeah, it got to decrease by that new amount, as I am using that money in the reserves for this purposes. F: Yeah, this is called Capitalization of Reserves. A, V: ok here we go. Before Bonus issue Share Paid-up capital 10rs*100,000
Share Premium capital 40rs*100,000 Reserves Total capital 1, 00, 00,000rs 1, 50, 00,000rs After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares)
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital So this turned in to After Bonus issue Share Paid-up capital 10rs*100,000 + 10rs*100,000(new shares) 1, 00, 00,000rs – (10rs *100,000 + 90rs*100,000) 1, 50, 00,000rs
Share Premium capital 40rs*100,000 + 90rs*100,000(new shares) Reserves Total capital 0 1, 50, 00,000rs Final after or Ex-Bonus issue Statement Share Paid-up capital 20, 00,000rs
Share Premium capital 1, 30, 00,000rs Reserves Total capital 0 1, 50, 00,000rs
So, the total capital still remains the same. A, V, F: Right! What happens in the case of Stock Split? A, V: The stock splits in the ratio we split, and there is no effect in the BS. Say in case of 2 stocks split the 100,000 shares is split into another 100,000 shares, in total we will have 200,000 shares. So, the Market Capitalization i.e. Market Price of a Share * Number of Shares remains the same as the stock is split in two and each of this has one half of the original market value. So, 100,000 * 100 = 1, 00, 00,000rs (So, I will have to pay 1cr as of now to buy all the equity shares of the firm) 100,000 turn in to 200,000 shares and since the Market Cap is going to be the same 1cr then the price of a share after Stock Split is Market Capitalization =. Market Price of a Share * Number of Shares 1, 00, 00,000rs = Market Price of a Share * 200,000 shares Market Price of a Share = 1, 00, 00,000rs / 200,000 shares Market Price of a Share =50rs A, V, F: That’s great… Now the question asked to readers or upcoming financial analyst is 1. Analyze if this Arun co. gives 1:1 bonus first and 1:1 stock split. 2. Analyze if this Arun co. gives 1:1 stock split and 1:1 bonus first. 3. Find out which kind of process cash more money out of firms cash box, either bonus first and stock split next or stock split first and bonus next. Please do validate this with numbers.
