In the intricate world of investments certain terms and concepts play a critical role in guiding investors. One such term is “free capital increase.” While it may at first sound complex we will help you unravel its meaning and explore its significance step by step. A free capital increase refers to the process of raising a company’s capital using its internal resources without imposing any additional costs on shareholders. In this process the company issues new stock and distributes it to existing shareholders which increases the company’s capital without any monetary inflow.
Reasons Behind Free Capital Increase and Its Benefits
A free capital increase is driven by various strategic and financial considerations. There are five main reasons why companies decide to undertake bonus capital increases . Firstly increasing paid-in capital allows companies to strengthen their financial position and provides the necessary funds to finance investments and stabilize their capital structure. Bonus capital increases enable companies to secure funds for their growth and expansion plans. This makes sure that additional capital is available to support the company’s strategic objectives . Another point is the fact that free capital increases can improve existing shareholders’ loyalty by granting them additional stock. In some jurisdictions bonus share issuances can result in tax benefits for companies which would relieve their tax burdens and improve their financial position . Companies can adjust their financial structures by raising free capital. And finally by undertaking a bonus capital increase companies not only strengthen their capital structure but also provide additional shares to shareholders without any cost which fosters stronger connections with investors.
Impact on Share Price, Share Ratio, Company Value and Liquidity
While the market price of existing shares may experience a decline following a free capital increase shareholders’ investment value remains unaffected since the new shares are received at the designated rate. Here are the key aspects related to share price, share ratio, company value and liquidity.
Share Price: With an increase in the number of shares in circulation, the value per share typically decreases while the par value remains constant . This often results in a decline in the market price of the stock.
Value of the Company: A bonus issue usually increases the equity of the company. However he value of the company remains relatively unchanged.
Share Ratio: During a bonus issue the number of shares held by current shareholders increases but the proportion of each shareholder’s stake in the company remains the same .
Liquidity: Bonus capital increases can enhance the liquidity of stocks by increasing the number of shares available in the market.
A free capital increase allows companies to strengthen their capital structure while providing additional shares to shareholders without any cost . Although the market price of existing shares may decrease shareholders’ overall investment value remains the same.