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 describes a scenario where Jumbo Limited is raising funds through a rights issue of equity shares. It provides information about the company's existing equity share capital, market value per share, and the terms of the rights issue. The question requires calculating: (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.
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
We are given the existing equity share capital as ₹40,00,000 and the market value per share as ₹45. We can calculate the number of existing shares by dividing the total equity share capital by the market value per share.
Number of existing shares $= \frac{40,00,000}{45} = 88,888.89$ shares
- Calculate the number of new shares issued
The company offers 2 shares for every 5 shares held.
Number of new shares $= \frac{2}{5} \times 88,888.89 = 35,555.56$ shares
- Calculate the total market value before the rights issue
Total market value before rights issue = Number of existing shares $\times$ Market value per share $= 88,888.89 \times 45 = ₹40,00,000$
- Calculate the total amount received from the rights issue
The rights issue price is ₹12 per share.
Total amount received = Number of new shares $\times$ Rights issue price $= 35,555.56 \times 12 = ₹4,26,666.72$
- Calculate the total market value after the rights issue
Total market value after rights issue = Total market value before rights issue + Total amount received from rights issue $= 40,00,000 + 4,26,666.72 = ₹44,26,666.72$
- Calculate the total number of shares after the rights issue
Total number of shares after rights issue = Number of existing shares + Number of new shares $= 88,888.89 + 35,555.56 = 124,444.45$ shares
- Calculate the theoretical market price per share after the rights issue
Theoretical market price per share (ex-rights) = $\frac{\text{Total market value after rights issue}}{\text{Total number of shares after rights issue}}$ $= \frac{44,26,666.72}{124,444.45}= ₹35.57$
- Calculate the value of the rights
Value of right = Market price per share before rights issue - Theoretical market price per share after rights issue $= 45 - 35.57 = ₹9.43$
- Calculate the increase in share capital
Increase in share capital = Number of new shares $\times$ Rights issue price $= 35,555.56 \times 12 = ₹4,26,666.72$
- Calculate the percentage increase in share capital
Percentage increase in share capital $= \frac{\text{Increase in share capital}}{\text{Existing equity share capital}} \times 100$ $= \frac{4,26,666.72}{40,00,000} \times 100 = 10.67%$
(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 the dilution effect of issuing new shares at a price lower than the current market price. The value of the right represents the benefit a shareholder gets from being able to purchase new shares at a discounted price. The percentage increase in share capital shows the relative expansion of the company's equity base as a result of the rights issue.
Tips
- Incorrect Calculation of Shares: A common mistake is not correctly calculating the number of new shares issued based on the rights issue terms. Carefully apply the ratio (2 shares for every 5 shares held) to the existing number of shares.
- Using Book Value for Market Value: Confusing the book value of the existing equity share capital with the market value per share. The calculation of the theoretical market price and value of rights depends on the market value of the share before the rights issue.
- Incorrect Formula for Value of Rights: Misremembering or incorrectly applying the formula to calculate the value of the right.
AI-generated content may contain errors. Please verify critical information
