A firm’s shares currently sell for $32.48, with 5 million shares outstanding. The firm is considering a 1-for-5 bonus issue. After the issue, at what share price will the shareholder’s wealth be unchanged?
Question
A firm’s shares currently sell for $32.48, with 5 million shares outstanding. The firm is considering a 1-for-5 bonus issue. After the issue, at what share price will the shareholder’s wealth be unchanged?
Solution
To find the share price after the bonus issue where the shareholder's wealth remains unchanged, we need to follow these steps:
-
Calculate the total market value of the firm before the bonus issue. This is done by multiplying the current share price by the number of shares outstanding. In this case, 162,400,000.
-
After the 1-for-5 bonus issue, the number of shares outstanding will increase. For every 5 shares a shareholder owns, they receive 1 additional share. So, the new number of shares outstanding will be 5,000,000 + (5,000,000 / 5) = 6,000,000 shares.
-
The total market value of the firm remains the same after the bonus issue because the bonus issue simply divides the existing equity into a larger number of shares. It does not add any real value to the firm.
-
Therefore, to find the new share price, we divide the total market value of the firm by the new number of shares outstanding. So, 27.07.
So, after the 1-for-5 bonus issue, the share price at which the shareholder's wealth will be unchanged is $27.07.
Similar Questions
ABC Corporation issues a 1-for-5 bonus share. If an investor owns 100 shares before the bonus issue, how many shares will they own afterwards?a.20b.120c.125d.80
A bonus issue of shares to existing shareholders has which of the following impacts on the equity of a company? Total equity increases. Total equity decreases. No overall change in total equity. Only the amount of issued share capital changes.
Your firm has a dividend policy that pays constant dividend of $1 per share to ordinary shareholders perpetually. Given your firm’s shareholders’ required rate of return of 5%, calculate the firm’s share price.Group of answer choices$20.00$2.00$200.00$0.05Next
How does a Bonus Issue theotrically impact the share price?(1.0 Marks)It Increases The Share PriceAIt Decreases The Share PriceBNo Impact On Share PriceCIt Doubles The Share Price
On 1 January 20X4, Sam Co had 3 million ordinary shares in issue. On 1 June 20X4, SamCo made a 1 for 3 bonus issue. On 30 September 20X4, Sam Co issued a further 1 millionshares at full market price. Sam Co had profits attributable to ordinary equity holders of $2million for the year ended 31 December 20X4.What is the basic earnings per share figure for the year ended 31 December 20X4, accordingto IAS 33 Earnings Per Share?A 47.1¢B 52.2¢C 56.8¢D 50.0¢
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.