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The fundamental value of a share can be estimated based on the future dividend stream and the average rate of return of the security in the market. The expected future dividend stream is calculated by knowing the present dividend and its average growth rate. The expected return on a security is made on the basis of the riskiness of investment which is given by the modern portfolio theory. Alternatively, the expected return on a share can be made over a long period by computing the historical return on a comparable share which is in the same risk situation.
Bonus issues are made by companies with profitable operations. For these companies, the retained earnings or reserves can become very large. The management decides to issue bonus shares by transferring some amount from the retained earnings or reserves into share capital. This is done by a book entry. The effect that this has is an increase the share capital and a decrease in the reserves in the balance sheet of a firm. When bonus issue is made, it has the effect of keeping the market price per share low on account of the enlarged share capital base. Bonus issues do not really change the fortunes of the business or the shareholders. This is because the company has decided to allot shares with a chosen rate say 1:2; or 1 bonus share for every two share held by the shareholder. However, the same effect could have been reached by the company declared a 50% dividend per share without making any bonus issue.
The fundamental value of a share can be estimated based on the future dividend stream and the average rate of return of the security in the market. The expected future dividend stream is calculated by knowing the present dividend and its average growth rate. The expected return on a security is made on the basis of the riskiness of investment which is given by the modern portfolio theory. Alternatively, the expected return on a share can be made over a long period by computing the historical return on a comparable share which is in the same risk situation.
Bonus issues are made by companies with profitable operations. For these companies, the retained earnings or reserves can become very large. The management decides to issue bonus shares by transferring some amount from the retained earnings or reserves into share capital. This is done by a book entry. The effect that this has is an increase the share capital and a decrease in the reserves in the balance sheet of a firm. When bonus issue is made, it has the effect of keeping the market price per share low on account of the enlarged share capital base. Bonus issues do not really change the fortunes of the business or the shareholders. This is because the company has decided to allot shares with a chosen rate say 1:2; or 1 bonus share for every two share held by the shareholder. However, the same effect could have been reached by the company declared a 50% dividend per share without making any bonus issue.
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