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Corporate Actions: of Bonuses & Splits

The Various Types Of Corporate Actions

Corporate actions are proposed and initiated by a company’s board of directors and authorised by the shareholders. Some corporate actions might have a direct/indirect impact on the shareholder’s wealth. Some corporate actions may require shareholders’ approval at the Extraordinary General Meeting (EGM) as well.

Examples of corporate actions are bonus issue, stock splits, stock consolidation, dividends, share dividends, mergers and acquisitions, spin-offs and rights issues.

Bonus issue

A bonus issue refers to the issue of free shares from the capital reserves. Bonus issue can increase the trading liquidity of the company’s shares in the market whilst the share prices shall adjust accordingly.

For instance, ABC Bhd announced a 1-for-4 bonus issue of shares. This implies that a shareholder whom own four shares of ABC Bhd will be given one additional share in the company. Some of the company details include;

Number of existing shares: 100.0 mln
Current share price: RM1.00
Market Capitalisation: RM100.0 mln

Based on the above scenario, Mr. X holds 100 shares in ABC Bhd prior to bonus issue adjustment.

Mr. X’s investment value = RM1.00 x 100 shares

= RM100

After bonus issue, Mr. X will hold 125 shares (100 x 5/4) while the share price shall be adjusted to;

RM1.00 x 4/5 = RM0.80

Mr. X’s investment value = RM0.80 x 125

= RM100

Meanwhile, the company’s market capitalisation remains unchanged at;
Market Capitalisation = RM0.80 x 125 mln shares
= RM100.0 mln

Stock split

Stock split divides a company’s existing shares into multiple shares. Similar with bonus issue, stock splits can increase the trading liquidity of the company’s shares in the market whilst the share prices shall adjust accordingly.

For instance, ABC Bhd announced a 2-for-1 stock split of shares. This implies that a shareholder whom own ten shares of ABC Bhd will be given ten additional shares in the company. Some of the company details include;

Number of existing shares: 100.0 mln
Current share price: RM1.00
Market Capitalisation: RM100.0 mln

Based on the above scenario, Mr. X holds 100 shares in ABC Bhd prior to share split adjustment.
Mr. X’s investment value = RM1.00 x 100 shares
= RM100

After share spit, Mr. X will hold 200 shares (100 x 2) while the share price shall be adjusted to;

RM1.00 x 1/2 = RM0.50
Mr. X’s investment value = RM0.50 x 200
= RM100

Meanwhile, the company’s market capitalisation remains unchanged at;
Market Capitalisation = RM0.50 x 200 mln shares
= RM100.0 mln

Stock consolidation

Stock consolidation reduces the total number of outstanding shares. In contrary to bonus issue and share split, stock consolidation reduces the shares outstanding as well as the free float of the company.

For instance, ABC Bhd announced a 1-for-10 stock split of shares. This implies that a shareholder whom own ten shares of ABC Bhd will be see his/her holdings consolidated into one share. Some of the company details include;

Number of existing shares: 500.0 mln
Current share price: RM0.10
Market Capitalisation: RM50.0 mln

Based on the above scenario, Mr. X holds 500 shares in ABC Bhd prior to stock consolidation adjustment.

Mr. X’s investment value = RM0.10 x 500 shares
= RM50

After share consolidation, Mr. X will hold 50 shares (500 x 1/10) while the share price shall be adjusted to;

RM0.10 x 10 = RM1.00
Mr. X’s investment value = RM1.00 x 50
=RM50

Meanwhile, the company’s market capitalisation remains unchanged at;
Market Capitalisation = RM1.00 x 50 mln shares
= RM50.0 mln

Well, these are just a few of the corporate actions that are available out there. Wanna know more? Tune in as we cover dividends, M&A, spinoffs and right issues in the next article.

 

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