HOW TO CALCULATE SHARE PRICE AFTER BONUS ISSUE?

The main source of finance for companies is equity finance. Companies raise equity finance by issuing shares of the company to investors.

To buy these shares, investors must pay a price, which is the market value of the share at the time of issuance.

All shares of a company have a par value, that is the book value of the shares. However, the market value of the shares might be different than their par value.

There are many factors that determine the price of a share of a company in the market.

These factors may include but are not limited to, the performance of the company in recent years, any market speculations around the shares, or the supply and demand of the shares in the market.

For example, if the performance of the company has been improving recently, the share prices of the company will also experience a raise.

Mostly, the reasons for fluctuations in the price of the share of a company in the market are beyond the control of the company.

While companies can control their performance, other factors such as market supply and demand are outside their control.

Apart from the performance of the company in recent years, there are some other factors controlled by the company that can result in a fluctuation of the market prices of the shares of the company.

These factors are mainly influenced by movement of shares in the company, which trigger external events, thus, affecting the prices of the shares.

For example, if a company issues more shares in the market, the supply for the shares will increase, consequently, decreasing the market price of the shares.

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In addition to issuing shares, other types of share movements can also dictate the price of a share in the market.

The other share movement-related factors that can be controlled by companies and can dictate the market price of the share are bonus issues, rights issues, stock splits, buyback of shares, and paying dividends.

Any of these events will alter either the demand or the supply of the shares of the company, thus, affecting the price of the shares of the company. These effects can be positive or negative.

Bonus Issues

When a company issues its shares to its existing shareholders without any charges and based on their current holding of shares, it is known as bonus issues.

Bonus shares are issued from the reserves of the company. Bonus shares are mainly used as an alternative to paying cash dividends.

For example, a company has 100,000 issued shares in the market and announces a 2 for 25 bonus issue shares.

This means that the company will issue a total of 8,000 (100,000 x 2 / 25) shares to its existing shareholders.

Regardless of the market price of the shares at the time of bonus issue, the shareholders of the company will not have to pay any cash to receive these shares.

Bonus issues will create an increase in the supply of shares of the company in the market. This will result in a decreasing of the market price of the shares.

Since there is a decrease in the market price of the shares after bonus issues, the prices of the shares have to be recalculated after every bonus issue is made.

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The reduction in the price of the share is directly proportional to the number of shares issued as bonus.

Example

A company, ABC Co. had a total of 50,000 shares currently issued with a market price of $150 per share.

The company announced a bonus shares issue of 1 bonus share for every 5 shares owned. This means the company issued a total of 10,000 additional shares (50,000 x 1 / 5).

To calculate the share price after bonus issue of ABC Co., the total value of the shares before the bonus issue must be determined. The value of the shares before the bonus issue was $7,500,000 (50,000 x $100).

After the bonus issue, the number of shares of the company increased from 50,000 to 60,000.

To calculate the share price after the bonus issue, the total value of shares before the bonus issue must be divided on the new number of shares. Therefore, the share price after the bonus issue will be $125 ($7,500,000 / 60,000 shares).

This can also be summarized in the table below:

Conclusion

The market value of the shares of a company is determined by mainly external factors but can also be influenced by internal factors.

Share movements caused by internal factors such as bonus issues can affect the market price of the shares.

Bonus issues are shares issued by a company to its shareholders based on their existing holding of shares.

These issues are made as an alternative to cash dividends and are free of charge to the shareholders.

To calculate the share price after bonus issues, companies must divide the total value of shares of the company before the bonus issue on the number of shares of the company after the bonus issue.

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