Jumbo Limited is planning to raise funds by making a rights issue of equity shares to finance its expansion. The existing equity share capital of the company is ₹ 40,00,000. The ma... Jumbo Limited is planning to raise funds by making a rights issue of equity shares to finance its expansion. The existing equity share capital of the company is ₹ 40,00,000. The market value of its share is ₹ 45. The company offers its shareholders the right to buy 2 shares at ₹ 12 each for every 5 shares held. Calculate: (i) Theoretical market price per share after the rights issue; (ii) The value of rights; and (iii) Percentage increase in share capital. Read more

Steps to Solve

1. Calculate the number of existing shares

To find the number of existing shares, divide the existing equity share capital by the market value per share. $$ \text{Number of existing shares} = \frac{\text{Existing equity share capital}}{\text{Market value per share}} $$ $$ \text{Number of existing shares} = \frac{40,00,000}{45} = 88,888.89 \approx 88,889 \text{ shares} $$

2. Calculate the number of new shares issued

The company offers 2 new shares for every 5 shares held.

$$ \text{Number of new shares} = \frac{2}{5} \times \text{Number of existing shares} $$ $$ \text{Number of new shares} = \frac{2}{5} \times 88,889 = 35,555.6 \approx 35,556 \text{ shares} $$

3. Calculate the total market value before the rights issue $$ \text{Total market value before rights issue} = \text{Number of existing shares} \times \text{Market value per share} $$ $$ \text{Total market value before rights issue} = 88,889 \times 45 = 40,00,005 \text{ ₹} $$

4. Calculate the total amount received from the rights issue

The company offers the new shares at ₹12 each.

$$ \text{Total amount from rights issue} = \text{Number of new shares} \times \text{Issue price per share} $$ $$ \text{Total amount from rights issue} = 35,556 \times 12 = 4,26,672 \text{ ₹} $$

5. Calculate the aggregate market value Sum of the total market value before the rights issue and the funds raised from the rights issue.

$$ \text{Aggregate market value} = \text{Total market value before rights issue} + \text{Total amount from rights issue} $$ $$ \text{Aggregate market value} = 40,00,005 + 4,26,672 = 44,26,677 \text{ ₹} $$

6. Calculate the total number of shares after the rights issue $$ \text{Total number of shares after rights issue} = \text{Number of existing shares} + \text{Number of new shares} $$ $$ \text{Total number of shares after rights issue} = 88,889 + 35,556 = 1,24,445 \text{ shares} $$

7. Calculate the theoretical market price per share after the rights issue

Divide the aggregate market value by the total number of shares after the rights issue. $$ \text{Theoretical market price per share} = \frac{\text{Aggregate market value}}{\text{Total number of shares after rights issue}} $$ $$ \text{Theoretical market price per share} = \frac{44,26,677}{1,24,445} = 35.57 \text{ ₹} $$

8. Calculate the value of the right

$$ \text{Value of right} = \frac{\text{Market price before rights issue} - \text{Issue price}}{\text{Number of rights required to purchase a new share}} $$

Since 5 old shares allow you to buy 2 new shares, then $5/2 = 2.5$ rights are needed for one new share $$ \text{Value of right} = \frac{45 - 12}{2.5} $$ $$ \text{Value of right} = \frac{33}{2.5} = 13.2 \text{ ₹} $$

9. Calculate the increase in share capital

The original share capital was $40,00,000$. The company issued $35,556$ new shares at $12$ ₹ each. $$ \text{Increase in share capital} = \text{Number of new shares} \times \text{Issue price per share} = 35,556 \times 12 = 4,26,672 \text{ ₹} $$

10. Calculate the percentage increase in share capital

$$ \text{Percentage increase in share capital} = \frac{\text{Increase in share capital}}{\text{Existing equity share capital}} \times 100 $$ $$ \text{Percentage increase in share capital} = \frac{4,26,672}{40,00,000} \times 100 = 10.67% $$