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Bonus share

shreya sharma (trainee) (107 Points)

15 October 2012

hey all,

My questions is after bonus issue why share prices get decline and is it by market forces as more liquidity arise or is it arithmetically decided by the stock exchange like share of rs. 500 bonus issue 1:4, so, share prices after ex-bonus 100.

my main point is, is it arithematically divide by the stock exchange proportionately as EPS goes down or the market forces affects, which randomly declines to near by the proportionate price.

shreya sharma

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deepali agarwal (Company Secretary) (1289 Points)
Replied 15 October 2012

A bonus issue adds to the total number of shares in the market.Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares.This is referred to as a dilution in equity.Now the earnings of the company will have to be divided by that many more shares.(Earnings Per Share = Net Profit/ Number of Shares)Since the profits remain the same but the number of shares has increased, the EPS will decline.