Rationale Homework Help

Rationale

As pointed out earlier, no major economic benefit results from bonus shares and share splits. Yet certain advantages are associated with them. In the first place the issue of bonus shares, splits would have the effect of bringing the market price of shares within more popular range and result of larger number of shares outstanding. The larger number of outstanding shares will promote more active trading in the shares due to availability of floating stock. Yet another advantage might relate to the informational content of bonus split announcement. The announcement perceived as favorable news by the investors in that with growing earnings, the company bright prospects and the investors can reasonably look for increase in future dividends. Moreover, it enables the conservation of corporate cash. If the bonus share is an effort to conserve cash profitable investment opportunities, the share prices will tend to rise and the shareholders benefit. However, if the move to conserve cash relates to financial difficulties within the firm, the price will most likely react adversely. Finally, bonus split announcements improve the properties raising additional funds particularly through the issue of convertible debentures.

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