 Cash dividend

 Bonus shares or Stock dividend

 Most companies pay dividend in cash .
Sometimes cash dividend may be supplemented by a
bonus issue (stock dividend). A company should have
enough cash in its bank account when cash dividends are
declared .
If the company follows a stable dividend policy
 If the company does not have enough bank balance at the
time of paying cash dividend, arrangement should be
made to borrow funds. When the company follows a
stable dividend policy , it should prepare a cash budget
for the coming period to indicate the necessary funds
which would be needed to meet the regular dividend
payment of the company.
If the company follows a unstable policy
 It is relatively difficult to make cash planning in
anticipation of dividend needs when the unstable policy
is followed.
 The cash account and the reserves
account of company will be reduced when the cash
dividend is paid . Thus both the total assets and the net
worth of the company are reduced when the cash
dividend is distributed . The market price of the share
drops in most cases by the amount of the cash
dividend distributed.
 An issue of bonus shares represents
a distribution of shares in addition to the cash
dividend (known as stock dividend in U S A) to the
existing shareholders . This has the effect in
increasing the number of outstanding shares of the
company. The shares are distributed proportionately .
Thus, a shareholder retain his proportionate
ownership of the company.
The bonus shares do not affect the wealth of the
shareholders. In practice , however , it carries
advantages both to shareholders and the company
Shareholders :The following are advantage of the
bonus shares:
 Tax benefit
 Indication of higher future benefit
 Future dividends may increase
 Psychological value
Company : The bonus share is also advantageous to
the company. The advantages are
 Conservation of cash
 Only means to pay dividend under financial difficulty
and contractual restrictions
 More attractive share price
 The bonus shares do not affect wealth. In fact bones
issue does not give any extra or special benefit to a
shareholder
 It is more costly to the administer than cash dividend
 Shareholder preferring cash to stock dividend may be
disappointed
 A share spilt is a method to increase the
number of outstanding shares through proportional
reduction in the par value of the share . A share spilt
affects only the par value and the number of
outstanding shares, the shareholders total remain
unaltered.
 As with the shares the total net
worth does not change and the number of
outstanding shares increases with the
share spilt . However , with the share spilt ,
the number of outstanding shares
increases substantially . The bonus issue
and the share spilt are similar except for
the difference in their accounting
treatment.
 In case of the bonus shares the balance of
the of the reserves and surplus account decrease due to
the transfer to the equity capital and the share premium
accounts. The par value per share remain unaffected with
a share spilt , the balance of the equity accounts does not
change , but the par value per share changes , The
earnings per share will be diluted and the market price
per share will fall proportionately with a share spilt. But
the total value of the holding of a shareholder remains
unaffected with a share spilt
 The followings are reasons or splitting of firms
ordinary shares
 To make share attractive
 Indication of higher future profit
 Increased dividend
 Under the situation of falling price of
company’s share , the company want to reduce the
number of outstanding shares to prop up the market
price per share . The reduction of the number of
outstanding shares by increasing per share Par value
is known as reverse spilt