Prob. on RI

Prob. on RI - Hence, the Rights Ratio = 1 Rights share for...

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Problem on Rights Issue: Q.3. M Ltd plans to take up expansion scheme at a cost of Rs.24 crores to be financed by internal accruals of Rs.9 crores, and balance through Rights Issue. The current share capital of the co. is Rs.2.40 crore and the shares of the co. are currently quoted at Rs.345. M Ltd. Proposes to price the rights at Rs.250. Based on the above information, calculate the (a) Ratio of the Rights, (b) Value of the Rights, (c) Determine the gain/loss of a shareholder if he (i) Excercises his rights in the Rights Issue; (ii) Allows his rights to expire; and (iii) Sells his rights. Solution to Q3: a. Total size of the project outlay: Rs.24 crore. Less: Internal accruals =Rs.9 crore Size of the proposed rights = Rs.15 crores Pricing of the Rights: Rs.250/share (15 crore/250) (2.4 crore/10) No. of Rights shares =6,00,000 Existing Capital = 24,00,000 shares
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Unformatted text preview: Hence, the Rights Ratio = 1 Rights share for every 4 shares held. b. Computation of the Value of Rights ( R ): Pr - S R = -----------N + 1 Where, R = value of Rights 1 S = Strike Price of Rights Issue Pr = Market value of share N = No. of existing shares required to get 1 Rights Issue. 345 - 250 R = ---------------- = Rs.19 4 + 1 c. Gain/Loss to the shareholder. 1. The Ex-Rights price of the share is expected to be: NPr + S (4 x 345) +250 R = ----------- = ------------------- = Rs.326 N + 1 4+1 Assume X holds 100 shares. If he invests in the Rights Issue, ( Rs.) Existing Wealth = 100 x 345 = 34,500 Subscription in Rights Issue = 25 x 250 = 6,250 Total: = 40,750 Expected Post Rights Market value of the Port-Polio: 125 @ Rs.326 = Rs.40,750 Hence, no gain or loss to the shareholder. 2...
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Prob. on RI - Hence, the Rights Ratio = 1 Rights share for...

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