(a) Tax benefit
When a shareholder receives cash dividend from the company, he pays tax but a bonus issue
does not attract taxes. The shareholder can sell the new shares received to generate cash and
thereby realize a capital gain which is currently not taxable.
(b) Indication of higher profits in future
The issue of bonus shares is normally interpreted by shareholders as an indication of higher
profitability especially in an inefficient market. This is because a bonus issue is declared by
management when they expect a rise in earnings to offset additional outstanding shares. The
bonus issue thus convey important information to the market.
(c) Increase in future dividends
If a company has been following a policy of paying fixed dividend per share and continues it
after the declaration of the bonus issue, the total cash dividend the shareholder receives will
increase because of the increase in the number of shares.
(d) Conservation of cash
A company that issues bonus shares conserves cash that would otherwise have been paid as
dividend. This is particularly important if the company is facing cashflow or liquidity
problems.
Kavungya answered the question on April 14, 2021 at 20:04
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Date posted: April 14, 2021. Answers (1)