Why a Bonus Issue Does Not Automatically Increase Company Value
Distinguish a bonus issue's transfers within equity from its increase in share count, and use hypothetical figures to examine ex-rights pricing and misleading EPS and dividend comparisons.
A bonus issue allocates new shares to shareholders without requiring an additional payment, so the issue itself brings no external cash into the company. Separate the increase in share count from any actual change in business value.
Distinguish an increase in share capital from an increase in total equity
The source-of-funds item in the disclosure identifies which surplus account is being transferred to share capital. When capital surplus decreases and share capital increases by the same amount, the transfer itself does not increase total equity. Other changes, such as issuance costs, are separate. An increase in share capital should not be described as an increase in cash holdings. Actual KIND bonus issue disclosures present share capital and capital surplus before and after the issue, allowing you to compare the sum of the two accounts directly.
Compare the total value of the holding before and after the ex-rights adjustment
If one new share is allocated for each eligible existing share, the number of shares held doubles. All else equal, each share represents half as much ownership in the company. Rather than interpreting the displayed price adjustment alone as a crash or a bargain-buying opportunity, compare the share count, including the new shares to be received, multiplied by the price. Actual market prices may differ from theoretical values because of supply, demand, and expectations. If existing and new shares become tradable at different times, care is also needed when interpreting account valuations during the intervening period.
Put EPS and dividend records on the same share basis
Using pre-issue EPS with a post-issue price makes the PER appear artificially low. Check whether historical EPS and dividends per share have been adjusted for the change in share count. Also read the record date, eligible shares, treatment of treasury shares, and handling of fractional shares. A bonus issue announcement does not guarantee financial strength or higher future dividends, so examine operating cash flow and the separate dividend policy independently. A high allocation ratio does not imply a high economic return. When comparing dividends, record the total dividend as well as the per-share amount. Even if the dividend per share falls, an investor's total payment may stay the same if the number of shares held increases. Explain changes in share count and changes in dividend policy separately.
Worked example
Hypothetical example: If you hold 100 shares at KRW 30,000 each and receive two new shares for every existing share, your total becomes 300 shares. Under the simplified assumption of no change in business value, the calculation gives KRW 10,000 per share and a total value of KRW 3 million. If annual earnings are unchanged and previous EPS was KRW 3,000, adjusted EPS on the same share basis is KRW 1,000. Dividing KRW 10,000 by unadjusted EPS to claim a PER of 3.3 times is incorrect; using adjusted EPS gives the same 10 times as before.
What to check
- Identify the equity account used to fund the bonus issue.
- Check how many new shares are allocated per existing share.
- Compare holding values using the total share count, including new shares.
- Check whether historical EPS and dividends have been adjusted for the change in share count.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.