ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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What is the primary purpose of a scrip issue in stock management?

To raise new capital for the company
To split a single share into multiple shares
To enhance dividends for shareholders
To reduce marketability of shares

The correct answer is: To split a single share into multiple shares

A scrip issue, also known as a capitalization issue or a bonus issue, primarily involves issuing additional shares to existing shareholders in proportion to their existing holdings, essentially splitting the value of their shares without raising new capital. This process does not involve any transfer of cash; rather, it converts a portion of the company's retained earnings into share capital. When a company performs a scrip issue, shareholders may find it beneficial as their total number of shares increases, albeit at a lower nominal value per share. The total market capitalization remains the same immediately after the scrip issue, assuming no other market forces are at play, but the number of shares outstanding increases. This is different from other practices, such as raising capital or enhancing dividends. The primary objective is to make shares more accessible and enhance liquidity in the market by increasing the number of shares available for trading. However, it does not split shares in a manner that diminishes their total value or marketability, which allows for more shareholders to enter or partake in the trading of these shares without significant financial barriers. This mechanism thus serves to enhance shareholders’ liquidity and potentially make the shares more attractive.