Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

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If a company announces a bonus issue on a 5:6 basis, what will existing shareholders receive?

6 shares for every 5 they own
5 shares for every 6 they own
No additional shares
1 share for every share

The correct answer is: 5 shares for every 6 they own

The announcement of a bonus issue on a 5:6 basis means that for every 6 shares an existing shareholder owns, they will receive 5 additional shares. This is a way for a company to reward its shareholders without paying out cash dividends – instead, they are increasing the number of shares in circulation. This type of issue typically aims to enhance liquidity or adjust the share price to make it more appealing to investors while maintaining overall shareholder equity. The existing shareholders benefit from this arrangement as it increases their stake in the company proportionately. In this context, the description provided accurately reflects the terms of the bonus issue, thus clarifying that shareholders will receive a specified number of additional shares relative to their existing holdings. The other options do not correctly interpret the meaning of a 5:6 bonus issue and therefore do not align with this mechanism of share distribution.