Question

The determinants of bonus decision are

• A. Amount of profit
• B. Liquidity of funds
• C. Age of the company
• D. All of these

Hint:

A bonus issue is a sign of a company's financial strength. Therefore, decisions about it are based on multiple indicators of health and stability, including profitability, liquidity, and maturity.

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
The question asks for the factors that determine a company's decision to issue bonus shares. A bonus issue is the distribution of free shares to existing shareholders, which is done by capitalizing the company's accumulated reserves and profits.
Step 2: Analysis of Options:
Let's analyze how each factor influences the bonus issue decision.

(A) Amount of profit: A company must have sufficient accumulated profits or reserves to issue bonus shares. Without substantial profits, a bonus issue is not possible as it involves converting these reserves into share capital. This is a primary determinant.

(B) Liquidity of funds: While a bonus issue itself does not involve a cash outflow, the overall financial health and liquidity position of the company are crucial. A company with poor liquidity might be hesitant to lock its reserves into share capital, as it may need those reserves for operational needs. Strong liquidity indicates a healthy financial position, making a bonus issue more feasible.

(C) Age of the company: A well-established, mature company is more likely to have built up significant reserves over the years. Such companies often have stable earnings and are in a better position to issue bonus shares compared to a new, growing company that needs to reinvest all its profits.

Step 3: Final Answer:
Since the amount of profit, liquidity, and the age/maturity of the company are all important factors considered by the management before making a bonus decision, the correct answer is (D) All of these.