Jumbo Limited is planning to raise funds by making rights issue of equity shares to part finance its expansion. The existing equity share capital of the company is ₹40,00,000. The... Jumbo Limited is planning to raise funds by making rights issue of equity shares to part 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 to its shareholders the right to buy 2 shares at ₹12 each for every 5 shares held. You are required to calculate: (i) Theoretical market price per share after the rights issue; (ii) The value of rights; and (iii) Percentage increase in share capital
Understand the Problem
The question presents a scenario where Jumbo Limited is raising funds through a rights issue of equity shares. We need to calculate (i) the theoretical market price per share after the rights issue, (ii) the value of the rights, and (iii) the percentage increase in share capital based on the given information about the existing share capital, market value, and terms of the rights issue.
Answer
(i) ₹ 35.57 (ii) ₹ 9.43 (iii) 10.67%
Answer for screen readers
(i) Theoretical market price per share after the rights issue: ₹ 35.57
(ii) The value of rights: ₹ 9.43
(iii) Percentage increase in share capital: 10.67%
Steps to Solve
- Calculate the number of existing shares
Existing share capital is ₹ 40,00,000 and the market value per share is ₹ 45.
Number of existing shares = Existing share capital / Market value per share
Number of existing shares = $40,00,000 / 45 = 88,888.89$ shares, Round this up to 88,889 shares
- Calculate the number of new shares issued
The company offers 2 new shares for every 5 shares held.
Number of new shares = (2/5) * Number of existing shares
Number of new shares = $(2/5) * 88,889 = 35,555.6 \approx 35,556$ shares
- Calculate the total amount received from the rights issue
The issue price for each new share is ₹ 12.
Total amount received = Number of new shares * Issue price
Total amount received = $35,556 * 12 = ₹ 4,26,672$
- Calculate the aggregate market value
Aggregate market value = (Number of existing shares * Market value per share) + Total amount received
Aggregate market value = $(88,889 * 45) + 4,26,672$
Aggregate market value = $40,00,005 + 4,26,672 = ₹ 44,26,677$
- Calculate the total number of shares after the rights issue
Total number of shares = Number of existing shares + Number of new shares
Total number of shares = $88,889 + 35,556 = 1,24,445$ shares
- Calculate the theoretical market price per share after the rights issue
Theoretical market price per share = Aggregate market value / Total number of shares
Theoretical market price per share = $44,26,677 / 1,24,445 = ₹ 35.57$
- Calculate the value of the right
Value of right = (Market price per share - Issue price) / (Number of rights required to buy one share + 1)
Number of rights required to buy one share = 5/2 = 2.5
Value of right = $(45 - 35.57) / 2.5 = 9.43/3.5 = 2.694$ Alternate Formula: $ R = \frac{M_0 - S}{N+1}$ where $ M_0 $ is the market price per share before right issue i.e. 45, $ S $ is the subscription price i.e. 12 and $ N $ is the number of old shares required to get one new right share i.e. 5/2 = 2.5 $ R = \frac{45 - 12}{\frac{5}{2}+1} = \frac{33}{3.5}= ₹ 9.43 $
- Calculate the increase in share capital
Increase in share capital = Number of new shares * Issue price
Increase in share capital = $35,556 * 12 = ₹ 4,26,672$
- Calculate the percentage increase in share capital
Percentage increase = (Increase in share capital / Existing share capital) * 100
Percentage increase = $(4,26,672 / 40,00,000) * 100 = 10.67 %$
(i) Theoretical market price per share after the rights issue: ₹ 35.57
(ii) The value of rights: ₹ 9.43
(iii) Percentage increase in share capital: 10.67%
More Information
The theoretical market price reflects the expected price of the shares after the rights issue, considering both the existing market value and the discounted price offered in the rights issue. The value of the right represents the benefit a shareholder receives from being able to purchase new shares at a price below the market value. The percentage increase in share capital shows the extent to which the company's equity base has expanded as a result of the rights issue.
Tips
A common mistake is not rounding the share numbers appropriately which can lead to inaccuracies especially when calculating the aggregate value.
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