solution to right issue ca final sfm by pravinn mahajan

7/31/2019 Solution to right issue CA FINAL SFM By PRAVINN MAHAJAN

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PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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RIGHT ISSUE

Concept 1 Post right price per share it is the weighted average of price of share before rightand price at

which right shares are offered, weights being number of shares before rightissue and

shares offered for right

Post right price per share -

Example 1 No of shares before right issue = 1000

Mkt price of share before right issue = 50

Right issue = 1 share for every 4 shares held

( i.e 4 coupons needed for 1 rightShare)

Subscription price of right share = 30

Post right price per share = = 46

Concept 2 Value of right = It is the discount at which Right share is issued on the basis of post right price

of share

(in 1 right share)

i.e Post right price of share - Issue price of Right share

[ after right issue every shareholder of company holds the share whose Mkt price is post right price, but shareholder who holds right shares, purchased such right shares at subscription price of right shares. So diff

between Post right price at which such shares are held and price actually paid for such right shares is value of

right in 1 right share]

Alternativelyit can also be calculated as

[ Mkt price of share before right - Post right price of share] x no of shares against which

1 right share is issued

(No. of coupons for 1 right share)

Example In above example

Value of right = Post right price per share - Issue price of right share

= 46 - 30

= 16

Or

=[ Mkt price of share before right - Post right price of share] x no of shares against

which 1 right share is

issued

[ 50 - 46 ] x 4 = Rs 16


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Concept 3 If in above example 1, A shareholder holds 100 shares before right issue, determine the effect

on wealth of shareholder, if he

a. Exercise his right

b. Ignores the right

c. Sells the right

d. Sells 40% of right and exercise 60% of his right

Post right price per share = Rs 46

Value of right in 1 Right share = Rs 16

Wealth of shareholder before right issue = No. of share before right x Mkt. price before right

= 100 x 50

= 5,000

a. If share holder exercise his right

Share holder will purchase 25 shares in right issue

Wealth of shareholder after right issue =

Shares

No. of share after right x Mkt. price after right = 125 x 46 = 5,750

Cash paid for right shares = 25 x 30 = ( 750)

Total wealth 5,000

b. If shareholder does not exercise his right and ignores it

Wealth of share holder after Right issue = 100 x 46 = 4600

c. If share holder renounces his right and sell it

Wealth of shareholder after right issue =

Shares = 100 x 46 = 4600

Cash = 25 x 16 = 500

Total wealth 5,000

d. Shareholder sells 40% of his right and exercise 60% right

Shares after right issue = 115 x 46 = 5290

(25 x 0.60)

Cash paid for purchasing right shares = 15 x 30 = (450)

Cash received from selling 40% right =

25 x 0.4 10 x 16 = 160

Total wealth 5,000

Conclusion - Shareholders wealth will remain same whether he exercises his

right or sells his right or partial exercises or partly sells his right

Shareholder should not ignore his ignore his right


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Q1 Current market price of share = Rs 13

No.of shares outstanding = Rs 10,00,000

Funds required to finance new project = Rs 20,00,000

a. One right share for every 2 shares held

No of shares offered in right issue = = 5,00,000 shares

Subscription price of right shares = = Rs 4

Ex- Right price =

= 10

Value of right = Post right price of share - Issue price of Right share

In 1 right share = 10 - 4

= 6

Value of 1 right

coupon = = 3

b. One right share for every 4 shares held

No of shares offered in right issue = = 2,50,000 shares

Subscription price of right shares = = Rs 8

Ex- Right price =

= 12

Value of right = Post right price of share - Issue price of Right share

In 1 Right share

= 12 - 8

= 4

Value of 1 right

coupon = = 1


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c. Shareholders wealth before right issue = 10,00,000 x 13 = Rs 130,00,000

Shareholders wealth after right issue in (a)

Shares after right issue 15,00,000 x 10 = 150,00,000

Cash paid for acquiring right shares = (20,00,000)

Total wealth 130,00,000

Shareholders wealth after right issue in (b)

Shares after right issue 12,50,000 x 12 = 150,00,000

Cash paid for acquiring right shares = (20,00,000)

Total wealth 130,00,000

Shareholders wealth will remain same before and after right issue if right is exercised. It does not

affect the wealth of shareholder whether 1 right shares are issued against 2 shares or 4 shares

Q2 Current Market price of share = Rs 24

No. of shares outstanding = 75,000

Right issue = 1 share for every 4 shares held

= 18,750 shares

Subscription price for right shares = Rs 16 per share

a. Post right price per share -

= Rs 22.40

b. Value of right = Post right price per share - Issue price of right share

= 22.40 - 16

= Rs 6.40

c. Wealth of shareholder holding 1000 shares

Wealth before right issue = Rs 24,000

1000 x 24

Wealth after right issue

Shares 1,250 x 22.40 = Rs 28,000

Cash paid for right shares = Rs ( 4,000)

250 x 16

Total wealth 24,000

Wealth of shareholder will remain same before and after right issue, if shareholder exercise his right.

d. Wealth of shareholder holding 1000 shares if right is ignored

Wealth before right issue = Rs 24,000

1000 x 24

Wealth after right issue

Shares 1,000 x 22.40 = Rs 22,400

If shareholder ignores right, wealth after right issue will decrease by Rs 1,600


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Q3 Current market Price per share = Rs 50

Number of shares outstanding = 10,000

Right shares = 1 : 4

= 2,500 shares

Subscription Price = Rs 30

a. Post right price per share -

= Rs 46


= 46 - 30

= Rs 16

b. Wealth of the shareholder who holds 1600 shares

Wealth before Right Issue = 1,600 x 50 = 80,000

Wealth after right issue if he sells his right

Shares 1600 x 46 = 73,600

Cash 400 x 16 = 6,400

Total Wealth 80,000

Wealth after right issue if he exercises his right

Shares 2,000 x 46 = 92,000

Cash paid for right shares

400 x 30 = (12,000)

Total wealth 80,000

c. Wealth of shareholder after Right issue, if he ignores his Right

Wealth before Right Issue = 1,600 x 50 = 80,000

Wealth after right issue = 1,600 x 46 = 73,600

If shareholder ignores Right issue, his wealth will decrease by 6,400


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Q4 Current market price of share = Rs 6

Number of shares outstanding = 10 Million

Right shares = 1:4

I,e 2.5 Million shares

Subscription Price of Right shares = Rs 5

a. New Money raised = 2.5 Million x 5

= 12.5 Million

b. Now of rights required to buy 1 new share (Right coupons) = 4

c. Value of one right


= Rs 5.8


= 5.8 - 5

= Rs 0.8

Value of one right coupon = = 0.20

d. Ex right price Per share = Rs 5.8

e. Amount required to be paid to purchase 1 right share is Rs 5. If market price of share falls below

Rs 5, shareholder will give up his right to subscribe for Right shares.

Thus if Market value of existing shares go below 10 Million x Rs 5 = 50 million,

shareholder will not subscribe for right shares.

f. If Right shares are offered, and shareholder takes some action on such right shares ( whether

subscribe for such right shares or sell such right), it does not affect the Wealth of shareholders.

So, it does not matter, whether the subscription price is Rs 5 or Rs 4.

Position of shareholder will be same whether subscription price of Right share is rs 4 or Rs 5


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Q5 No. of shares outstanding = 4,00,000

a. Current market price of share

EPS = = Rs 20 / share

PE ratio ( ) = 8

Market price = EPS x 8= 20 x 8 = Rs 160

b. Right issue will be made @ 25% less than existing price.

Issue price of right shares = 160 x 0.75 = 120

c. Funds required for new investment = 240 lac

Issue price = Rs 120 per share

No. of new share to be issued = = 2 lac

d. Value of Right =


= Rs 146.67


= 146.67 - 120

= Rs 26.67


e. Market price of share after right issue on the basis of incremental earnings

Fund required for new investment = 240 lakh

Earnings on new investment = 15% x 240 lakh

= 36 lakh

Existing profits = 80 lakh

Total profits after new investment = 80 + 36 = 116 lakh

Total shares after right issue = 4 lakh + 2 lakh = 6 lakh

EPS after new investment = = 19.33

Required return on existing funds is = 12.5%

PE ratio = = = 8

Market price = EPS x 8

= 19.33 x 8 = Rs 154.64


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Q6 a. Current market price per share

Profit after tax 15 crore

EPS = Rs 7.5 per share

P.E ratio ) 9 times

Current Market price 9 x 7.5 = Rs 67.5

No of shares of Right IssueFunds required for Expansion 280 crore

Term Loan (140 crore)

Internal accruals (60 crore)

Funds to be raised by Right Issue 80 crore

Subscription price of Right Issue Rs 40 per share

No.of Right shares issued =2 crore


= Rs 53.75


= 53.75 - 47

= Rs 13.75


b. Market capitalization of company after right issue

No. of shares after Right issue x Mkt. Price after Right Issue

= 4 crore x 53.75

= 215 crore

C Net asset value ( Book value) of shares after right issue

Share capital 40 crore

( 4 crore x 10)

Reserve & surplus 120 crore (it includes PAT of current year)

Security premium

2 crore x 30 60 croreNet asset value 220 crore


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Q7 No of shares outstanding 10 Million

EPS Rs 0.40 per share

Total earnings for equity share holders 4 million

Interest on existing debentures 30 lac x 10% 3 lac

Tax rate 50%

PAT 4 Million

Tax 50% 4 Million

PBT 8 Million

Interest 0.3 Million

EBIT 8.3 Million

Company is redeeming its debentures by issuing Right shares of Rs 30,00,000

Statement of No. of shares after Right issue

EBIT 8.3 Million

Tax 4.15 Million

PAT 4.15 MillionEPS (after Right issue)

90% of existing EPS

0.40 x 0.9 0.36

No of shares 11.527778 Million shares

Existing shares 10 million

Right shares 1.527778 Million shares or 15.27778 lac shares

Issue price of right shares Rs 1.9636 per share

Right share is priced at price not less than 20% of Current market price

i.e @ 80 % of current market price

Current market price = = 2.4545


= Rs 2.39 per share

PE ratio = = 6.64 times

Q8 After Q 10


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Q9 Post right price per share -


In one Right share

Value of One Right coupon =

This is the value of one right coupon when share is selling Cum Rightor RIGHT ON

As this value of right is computed by taking current market price which is cum right

Alternativelyit can also be calculated as

Current market price of share - Post right price per share

Another alternative =

Given in ques

Value of one right coupon when =

Share is trading ex right


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Current Market price per share Rs 150

Right issue 1 : 9

Subscription price of Right shares Rs 125 per share

a. Value of right when stock is selling Right on ( value of one right coupon)

= 2.5 per share

b. One share of stock when it goes ex right = 150 - 2.5 = 147.5

c. Value of right when share sells ex right

If ex right price is 143 = = 2


Q10 Current Market price per share Rs 50

Right issue 1 : 5

Subscription price of Right shares Rs 40 per share

a. Value of right when stock is selling Right on ( value of one right coupon)

= 1.667 per share

b. One share of stock when it goes ex right = 50 - 1.667 = 48.333

c. Value of right when share sells ex right


d. R has Rs 1000

i. He will purchase share at Rs 50

And sell share at Rs 60

No of shares purchased = = 20 shares

Profit on speculation = 20 ( 60 - 50) = Rs 200


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ii. He may purchase Right at Rs @ per Right and sell it at Rs 4 per Right.

No. of rights purchased = = 500

Profit on sale of Rights = 500 ( 4 2)

= Rs 1,000

Profit is more if R sells Right,

Q8 ABC is planning to raise funds by making right issue of equity shares

No. of shares o/s = 10 lakh

Market price per share = Rs 40

1. If right shares are 4 for every 5 shares held , issued at par i.e 10

No. of right shares issued = x 4 = 8 lakh

Funds from right issue = Rs 80 lakh

i.


= Rs 26.67 per share

ii. value of rights = Post right Price - Issue price of right share= 26.67 - 10

= 16.67 per share

Iii % age increase in share capital

Existing share capital = 1 crore

Funds raised from right issue 80 lakh

Increase in share cap 80%

iv Since Right shares are issued at par so %age increase in Funds 80%

v. Present EPS = 4

Present market price = 40

PE ratio = = 10

Present earnings = 10 lakh x 4 = Rs 40 lakh

Earnings on New funds = 20%

i.e Earnings on New funds 80 lac x 20% = Rs 16 Lakh

Total earnings = Rs 56 Lakh


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EPS = = 3.111

Market price on the basis of earnings = PE ratio x EPS

= 10 x 3.111 = 31.11




6 lakh x 15

i.



ii. value of rights = Post right Price - Issue price of right share

= 30.625 - 15

= 15.625 per share


Existing share capital = 10 lakh

No of shares in Right issue 6 lakh


iv Funds before Right Issue = 100 lakh

Funds from right issue 6 lakh x 15 = 90 lakh

% age increase in funds = 90%

v. Present EPS = 4


PE ratio = = 10





EPS = = 3.625


= 10 x 3.625 = 36.25


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4 lakh x 20

i.




= 34.286 - 20

= 14.286 per share








v. Present EPS = 4


PE ratio = = 10





EPS = = 4


= 10 x 4 = 40




2 lakh x 25


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15

i.


= Rs 37.5 per share


= 37.5 - 25

= 12.5 per share








v. Present EPS = 4


PE ratio = = 10





EPS = = 4.167


= 10 x 4.167 = 41.67

solution to right issue ca final sfm by pravinn mahajan

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