a) Tax advantages

Shareholders can sell new shares, and generate cash in form of capital gains which is tax exempt unlike cash dividends which attract 5% withholding tax which is final

b) Indication of high profits in future:

A Bonus issue, in an inefficient market conveys important information about the future of the company.

It is declared when management expects increase in earning to offset additional outstanding shares so that E.P.S is not diluted.

c) Conservation of cash

Bonus issue conserves cash especially if the firm is in liquidity problems.

 d) Increase in future dividends

If a firm follows a fixed/constant D.P.S policy, then total future dividend would increase due to increase in number of shares after bonus issue.

 Journal entry in case of bonus issue

Dr. R. Earnings (par value)

Cr. Ordinary share capital (par value)

 NB: A firm can also make a script issue where bonus shares are directly from capital reserve.