Corporate Accounting

Differences Between Rights and Bonus Issues of Shares

Rights Issue

A rights issue grants existing shareholders the option to purchase more company shares, typically at a discount to the market price (how much they sell for currently).

This is a less expensive alternative to a complete public offering (i.e. to everyone). We are aware that they are already shareholders and that they may be interested in purchasing further shares. This is a method of financing that enables the organisation to purchase non-current assets, repay debts, etc.

The difference between the market price and the price at which shares can be sold is deposited in the share premium account.

Typically, shares are offered on a pro-rata basis — for example, 1 share for 2 shares. If so, multiply the current issued value of the shares by half to determine the number of new shares to be issued (in pounds). If the shares are sold at a premium, subtract the nominal price from the price at which they were issued and multiply the result by the number of shares sold.

Bonus Issue

This is done to ensure shareholder satisfaction. If a company is unable to pay dividends (e.g., due to insufficient funds or a desire to retain the money), it may distribute free shares on a scale of x to y. A bonus issuance does not raise finance.

If shares are distributed on a 1 for 3 bases, multiply the issued share capital (in dollars) by 1/3 to determine the number of shares distributed. However, since the value of the firm (i.e. total capital) does not change, another capital must be reduced; first from the Capital Reserves (such as the Share Premium or Revaluation reserve), and if it is not enough, from the Revenue Reserves.

Bonus issues may also be used to reduce the share price (via a share split) in order to make the shares appear more attractive to potential investors. For instance, a 1 for 9 bonus issuance will recapitalize reserves, decreasing $50 shares to around $5 while simultaneously diminishing other reserves.

READ MORE:  [Solved] Irene is saving for a new car
Show More

Leave a Reply

Back to top button