Question

The company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the company’s stock, which has a current stock price of $50 per share. Mathematically, what is the best choice? Why?

What are the advantages and disadvantages of each option?

What would you ultimately choose to do? What is your funancial reasoning behind this choice?

Answer 1

1) Cash bonus has a value of $5000 and the share option is also worth $5,000 (i.e. 100 share * $ 50 per share = $ 5,000) thus mathematically both are equal. However my choice will be stock option because I have a belief of long run prosperity of company. Thus due to increasing share price and accumulated dividends compared to accepting a fixed bonus I will prefer the stock bonus.

2) Bonus shares are beneficial for the investors who believe in the long-term story of the business and thus keen to increase their investment in the same. These are not taxable and will earn dividend on more shares in future than earlier. With issuance of shares, more capital will be available and thus more capital can be utilised for more expansion tasks. However it doesn’t provide any additional wealth to the shareholder because when share price declines by a proportionate amount to keep the market capital of the company same as before. Moreover administering cost of a bonus share plan is more compared to paying a cash dividend.

Cash is more liquid; and there is less risk taking. It imposes fiscal discipline and prevents the business from squandering wealth of shareholder and it also suits the requirements of many investors who require regular income. However cash-rich companies prefer cash dividends, while growing companies seek to reduce their share prices may opt for share bonuses.

3) Since I don’t have requirement of cash compensation to survive because currently I’ve got passive income and online income flowing in. Moreover I will have to pay tax on cash bonus; and stock bonus provides the flexibility whether I want to reinvest in the business tax-free, or want to cash by selling shares