Looking for the answer to the question below related to Financial Management ?
Find the odd one out
C. right issue
D. bonus issue
The Correct Answer Is:
- D. bonus issue
The correct answer is D. bonus issue. The reason why “bonus issue” is the odd one out among the options is because it represents a different type of corporate action compared to the other options. Let’s delve into the details of each option to understand why:
D. Bonus Issue:
A bonus issue, also known as a bonus share issue or scrip issue, is a corporate action where a company issues additional shares to its existing shareholders without any cost. These additional shares are distributed to shareholders in proportion to their existing holdings.
The purpose of a bonus issue is not to raise new capital but rather to capitalize a portion of the company’s retained earnings or reserves, converting them into additional equity capital.
Bonus issues are often used as a way to reward existing shareholders and enhance liquidity in the company’s stock. Unlike the other options, which involve raising new capital or altering the structure of shares, bonus issues do not involve the sale of shares or any direct impact on the company’s financial position.
Now, let’s examine why the other options are not correct:
A. IPO (Initial Public Offering):
An Initial Public Offering (IPO) is the process by which a private company goes public by issuing shares to the general public for the first time. During an IPO, the company offers its shares to investors in exchange for capital to fund its growth and operations.
IPOs are a means of raising new capital and allowing the company’s ownership to be distributed among a broader group of shareholders. Unlike bonus issues, which do not involve raising new capital or going public, IPOs are focused on the company’s expansion and market entry.
B. FPO (Follow-On Public Offering):
A Follow-On Public Offering (FPO) is similar to an IPO but occurs after a company has already gone public. In an FPO, a public company issues additional shares to the public, again with the goal of raising new capital.
FPOs are used by companies to fund various activities, such as expansion, debt repayment, or acquisitions. Like IPOs, FPOs are primarily a mechanism for capital raising and expanding the company’s shareholder base, which distinguishes them from bonus issues.
C. Right Issue:
A rights issue is a corporate action in which a company offers its existing shareholders the opportunity to purchase additional shares at a discounted price, typically in proportion to their existing holdings.
Rights issues are another method of raising capital, and they provide existing shareholders with the first opportunity to buy the new shares before they are offered to the general public.
Like IPOs and FPOs, rights issues are a means of raising new capital and may be used for various corporate purposes. This distinguishes them from bonus issues, which do not involve the sale of shares or raising new capital.
In summary, “bonus issue” is the odd one out because it represents a different type of corporate action compared to the other options, which involve raising new capital through the issuance of shares to either the general public (IPO and FPO) or existing shareholders (rights issue).
Bonus issues, on the other hand, involve distributing additional shares to existing shareholders as a reward or capitalization of retained earnings without any cost to the shareholders. Understanding these different corporate actions is essential for investors and stakeholders in the financial markets to make informed decisions.