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Although bonus shares do not increase the wealth of shareholders, it has certain advantages that make them more attractive than dividends. Some of the advantages of issuing bonus shares are mentioned below.Tax BenefitBonus shares are not taxable, however dividends are. Shareholders like to get bonus shares which they may sell in the market or hold for capital gains.The dividends obtained by shareholders are considered ordinary income. So, they need to pay income taxes that are larger than dividend share taxes. Therefore, the shareholders can sell bonus shares the taxes on which are less than general income tax. In this way, ... Read More
There are various forms of equities and debts that are used as financial instruments in India. Some of these instruments are given below.Ordinary SharesOrdinary shares offer a certain part of the ownership of the company to the shareholders. These shareholders offer permanent capital for the company’s projects. They have voting rights and can receive dividends when the board approves it.Preference SharesAs the name suggests, preference shares are preferred ones. The holders of preference shares get preference in case a company goes for liquidation.Preference shareholders must be paid dividends in case of liquidation before the ordinary shareholders.In India, companies can only ... Read More
What is Information Asymmetry?In an organization, there are many layers of managerial positions and the managers have information of different aspects about the business model and operations, and financial issues. The shareholders may not be aware of all the situations in operations as well as the finance segments of the business. This lack of knowledge that exists between the managers and shareholders is known as information asymmetry.What are Agency Costs?Information asymmetry can lead to a great deal of complexity in running a business organization.There may be conflicts between the managers and shareholders in running a business and managing it.Managers may ... Read More
By buying back the shares, companies usually see a positive effect on the utility of their surplus funds. As the shares bought back are extinguished and not re-issued, the value of outstanding shares in the market goes up. This imparts a positive effect on the valuation of both the companies and the shareholders’ wealth.Increases the EPSIf a company has surplus cash and manages its operational efficiency, the Earnings Per Share (EPS) will increase after the buyback process. Moreover, as the Price Earning (P/E) ratio remains the same, the price of the share will go up. This is so because the ... Read More
Bonus shares are additional shares issued by a company to existing shareholders based on their current stake in the company. When a company is unable to pay a dividend to its shareholders due to a lack of funds, it is common for them to issue Bonus shares. In such cases, instead of paying dividends, companies issue bonus shares to their existing shareholders. Investors do not have to pay any tax on the bonus shares they receive.In some countries such as India, bonus shares are issued with a cash dividend to offer the shareholders some form of income along with an ... Read More
It’s observed that there is often a conflict between a company's needs for funds and shareholders’ desire for current income. Companies have to maintain a fine balance while devising a dividend policy in order to please their investors as well as to meet their own funding requirements. There are certain constraints in devising a dividend policy for shareholders from the point of view of a company. Some of these constraints are highlighted below.Legal RestrictionsCompanies are legally bound to distribute dividends according to certain rules and regulations.For example, a company is not bound to offer dividends in all cases of net ... Read More
A company’s dividend policy is influenced significantly by its shareholders’ desire for income. Shareholders usually want regular and increasing income from the companies they invest in. The companies that can pay increasing dividends are considered healthy by the shareholders and if a company shows such quality, the investors would want to invest in them.Dividend Distribution in Closely-Held and Widely-Held CompaniesIn case of a closely-held company, the managers and board members of the company know the desire of its shareholders. Therefore, they can devise a dividend policy for the shareholders that meets the needs of their shareholders. These closely-held companies are ... Read More
The assumption in the MM model that dividends and capital gains do not attract any tax is not applicable in the real world. Usually, both dividends and future payouts (capital gains) attract a significant amount of tax.Tax on Capital Gains is Less as Compared to DividendsThe tax brackets for capital gains is, however, lower in most of the markets than current dividends’ tax. Therefore, a client in a higher tax bracket should prefer lower tax rates or capital gains, while a clientele in the lower tax bracket should like dividends.While considering the aspects of taxation, an investor in a higher ... Read More
A company’s dividend policy is influenced by its investment opportunities and the need for funds for its future projects. Generally, companies use retained earnings to source newer projects and expansion if they are in the growth phase. So, when it comes to paying dividends, growth companies often prefer to offer capital gains instead of current dividends.Internal Financing Vs External FinancingCompanies want to have the maximum financial flexibility in meeting their long-term project funding needs. To have such a situation, companies often rely on internal financing or retained earnings. It is easy to use internal financing to get the flexibility and ... Read More
When it comes to pay dividends, companies may choose two paths. One is paying out the dividends as they are generated and the other one is paying it on a later payment cycle in the future. The latter is known as capital gains in financial terms. Now, which one is more appealing to the shareholders? It is the former without any doubt.Shareholders prefer current dividends than capital gains for a host of reasons. However, the two that make the most impact are uncertainty and portfolio diversification. Let’s discuss these two factors individually to get a better understanding of the shareholder’s ... Read More