Solution To Right Issue CA FINAL SFM by PRAVINN MAHAJAN

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854
RIGHT ISSUE
Concept 1
Post right price per share it is the weighted average of price of share before right and price at
which right shares are offered, weights being number of shares before right issue and
shares offered for right
Post right price per share -
Example 1
No of shares before right issue

Mkt price of share before right issue
=
=
1000
50
Right issue
1 share for every 4 shares held
( i.e 4 coupons needed for 1 right

Share)
30
Subscription price of right share
Post right price per share

Concept 2
Value of right
=
of share
(in 1 right share)
46
It is the discount at which Right share is issued on the basis of post right price
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 share
holder 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]
Alternatively it can also be calculated as
[ Mkt price of share before right - Post right price of share] x
Example
In above example
Value of right
=
=
=
no of shares against which

1 right share is issued
(No. of coupons for 1 right share)
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
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
Value of right in 1 Right share
=
=
Rs 46
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
Cash paid for right shares
Total wealth
= 125 x 46
= 25 x 30
b. If shareholder does not exercise his right and ignores it

Wealth of share holder after Right issue
=
c.
=
=
5,750
( 750)
5,000
100 x 46
4600
=
100 x 46
=
25 x 16
Total wealth
=
=
4600
500
5,000
If share holder renounces his right and sell it

Wealth of shareholder after right issue
Shares
Cash
d. Shareholder sells 40% of his right and exercise 60% right

Shares after right issue
(25 x 0.60)
Cash paid for purchasing right shares
Cash received from selling 40% right
25 x 0.4
115 x 46
5290
=
=
15 x 30
(450)
10 x 16
160
Total wealth
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
5,000
Q1
Current market price of share

No.of shares outstanding
Funds required to finance new project
=
=
=
Rs 13
Rs 10,00,000
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 =
=
Value of right =
In 1 right share
=
=
Value of 1 right
coupon
10

10 - 4
6
=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 =
=
Value of right =
In 1 Right share
=
=

12 - 8
4
Value of 1 right
coupon
12
=1
c.
Shareholders wealth before right issue
10,00,000 x 13 =
Shareholders wealth after right issue in (a)

Shares after right issue 15,00,000 x 10 =
Cash paid for acquiring right shares
=
Total wealth
Rs 130,00,000
150,00,000
(20,00,000)
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

No. of shares outstanding
Right issue
=
=
=
Rs 24
75,000
1 share for every 4 shares held
= 18,750 shares
Subscription price for right shares

a.
Rs 16 per share
=
b.
Value of right
=
=
=
c.
Wealth of shareholder holding 1000 shares
Rs 22.40

22.40 - 16
Rs 6.40
Wealth before right issue

=
1000 x 24
Wealth after right issue
Shares 1,250 x 22.40
250 x 16
Total wealth
- Issue price of right share
Rs 24,000
=
=
Rs 28,000
Rs ( 4,000)
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
=
1000 x 24
Shares 1,000 x 22.40
Rs 24,000
Rs 22,400
If shareholder ignores right, wealth after right issue will decrease by Rs 1,600
Q3
Current market Price per share

Number of shares outstanding
Right shares
=
=
=
Rs 50
10,000
1 :4
= 2,500 shares
Subscription Price
a.
=
Value of right
b.
Rs 30
=
=
=
Rs 46

46 - 30
Rs 16
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
Cash
400 x 16
Total Wealth
=
=
73,600
6,400
80,000
Wealth after right issue if he exercises his right

Shares 2,000 x 46
400 x 30
Total wealth
c.
92,000
(12,000)
80,000
Wealth of shareholder after Right issue, if he ignores his Right

Wealth before Right Issue
= 1,600 x 50 = 80,000
1,600 x 46 = 73,600
If shareholder ignores Right issue, his wealth will decrease by 6,400
Q4
Current market price of share

Number of shares outstanding
Right shares
=
=
=
Subscription Price of Right shares
a. New Money raised
2.5 Million x 5
12.5 Million
=
=
Rs 6
10 Million
1:4
I,e 2.5 Million shares
Rs 5
b. Now of rights required to buy 1 new share

c.
(Right coupons) = 4
Value of one right
=
Value of right
=
=
=

5.8 - 5
Rs 0.8
Value of one right coupon

d. Ex right price Per share
Rs 5.8
= 0.20
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
Q5
No. of shares outstanding
4,00,000
a. Current market price of share

EPS
= Rs 20 / share
Market price
=
=
EPS x 8
20 x 8 =
PE ratio (
Rs 160
b. Right issue will be made @ 25% less than existing price.

Issue price of right shares =
160 x 0.75
=
c.
Funds required for new investment =

Issue price
=
No. of new share to be issued
d.
120
240 lac
Rs 120 per share
= 2 lac
Value of Right =
=
Value of right
=
=
=

146.67 - 120
Rs 26.67

e.
Rs 146.67
= 6.67
Market price of share after right issue on the basis of incremental earnings
Fund required for new investment
Earnings on new investment
=
=
=
240 lakh
15% x 240 lakh
36 lakh
Existing profits
Total profits after new investment
=
=
80 lakh
80 + 36 = 116 lakh
Total shares after right issue
4 lakh + 2 lakh = 6 lakh
EPS after new investment
Required return on existing funds is

PE ratio
Market price
=
=
12.5%
EPS x 8
19.33 x 8
= 19.33
= 8
Rs 154.64
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 =
No of shares of Right Issue

Funds required for Expansion
Term Loan
Internal accruals
Funds to be raised by Right Issue
Subscription price of Right Issue
Rs 67.5
280 crore
(140 crore)
(60 crore)
80 crore
Rs 40 per share
No.of Right shares issued
= 2 crore
=
Value of right
=
=
=
Rs 53.75

53.75 - 47
Rs 13.75
= 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
Net asset value ( Book value) of shares after right issue

Share capital
( 4 crore x 10)
Reserve & surplus
Security premium
2 crore x 30
Net asset value
40 crore
120 crore
60 crore
220 crore
(it includes PAT of current year)
Q7
No of shares outstanding
EPS
Total earnings for equity share holders
Interest on existing debentures 30 lac x 10%
Tax rate
PAT
Tax 50%
PBT
Interest
EBIT
10 Million
Rs 0.40 per share
4 million
3 lac
50%
4 Million
4 Million
8 Million
0.3 Million
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
Tax
PAT
EPS (after Right issue)
90% of existing EPS
0.40 x 0.9
8.3 Million
4.15 Million
4.15 Million
No of shares
Existing shares
Right shares
11.527778 Million shares

10 million
1.527778 Million shares or 15.27778 lac shares
0.36
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
PE ratio
Q8
= 6.64 times
After Q 10
Rs 2.39 per share
Q9
Value of right =
In one Right share
Value of One Right coupon
This is the value of one right coupon when share is selling Cum Right or RIGHT ON
As this value of right is computed by taking current market price which is cum right
Alternatively it can also be calculated as
Current market price of share Another alternative
Given in ques
Value of one right coupon when =
Share is trading ex right
10
Current Market price per share

Right issue
Subscription price of Right shares
Rs 150
1:9
Rs 125 per share
a. Value of right when stock is selling Right on ( value of one right coupon)
= 2.5 per share
Q10
b.
One share of stock when it goes ex right = 150 - 2.5
c.
Value of right when share sells ex right
If ex right price is 143
= 2
= 5
Current Market price per share

Right issue
Subscription price of Right shares
= 147.5
Rs 50
1:5
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
c.
Value of right when share sells ex right
= 48.333
= 2
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
11
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
Market price per share
=
=
10 lakh
Rs 40
1. If right shares are 4 for every 5 shares held , issued at par i.e 10
No. of right shares issued
Funds from right issue
x 4 = 8 lakh
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 =
Funds raised from right issue
Increase in share cap
1 crore
80 lakh
80%
iv
Since Right shares are issued at par so %age increase in Funds 80%
v.
Present EPS
Present market price
=4
= 40
PE ratio
Present earnings = 10 lakh x 4

Earnings on New funds
i.e Earnings on New funds 80 lac x 20%
Total earnings
= Rs 40 lakh
= 20%
= Rs 16 Lakh
= Rs 56 Lakh
12
= 10
2.
EPS
Market price on the basis of earnings
=
=
= 3.111
PE ratio x EPS
10 x 3.111 = 31.11
If right shares are 3 for every 5 shares held , issued at par i.e 15

6 lakh x 15
x 3 = 6 lakh
Rs 90 lakh
i.
=
=
=
=
Rs 30.625 per share
ii.
value of rights

30.625 - 15
15.625 per share
Iii

Existing share capital
No of shares in Right issue
iv
Funds before Right Issue

Funds from right issue 6 lakh x 15
% age increase in funds
=
=
=
v.
Present EPS
=4
= 40
PE ratio

Total earnings
= Rs 40 lakh
= 20%
= Rs 18 Lakh
= Rs 58 Lakh
EPS
=
=
13
10 lakh
6 lakh
60%
100 lakh
90 lakh
90%
= 10
= 3.625
PE ratio x EPS
10 x 3.625 = 36.25
3.

4 lakh x 20
x 2 = 4 lakh
Rs 80 lakh
i.
=
=
=
=
Rs 34.286 per share
ii.
value of rights

34.286 - 20
14.286 per share
Iii

iv

=
=
=
v.
Present EPS
=4
= 40
PE ratio

Total earnings
= Rs 40 lakh
= 20%
= Rs 16 Lakh
= Rs 56 Lakh
EPS
=
=
4.
10 lakh
4 lakh
40%
100 lakh
80 lakh
80%
= 10
=4
PE ratio x EPS
10 x 4 = 40

2 lakh x 25
14
x 1 = 2 lakh
Rs 50 lakh
i.
=
=
=
=
Rs 37.5 per share
ii.
value of rights

37.5 - 25
12.5 per share
Iii

iv

=
=
=
v.
Present EPS
=4
= 40
PE ratio

Total earnings
= Rs 40 lakh
= 20%
= Rs 10 Lakh
= Rs 50 Lakh
EPS
=
=
15
10 lakh
2 lakh
20%
100 lakh
50 lakh
50%
= 10
= 4.167
PE ratio x EPS
10 x 4.167 = 41.67

Solution To Right Issue CA FINAL SFM by PRAVINN MAHAJAN

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PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

No of shares before right issue

1 share for every 4 shares held

( i.e 4 coupons needed for 1 right

Subscription price of right share

Post right price per share

Post right price of share - Issue price of Right share

no of shares against which

Post right price per share - Issue price of right share

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

If share holder renounces his right and sell it

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

Shareholders wealth will remain same whether he exercises his

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Current market price of share

a. One right share for every 2 shares held

Subscription price of right shares

Ex- Right price =

Post right price of share - Issue price of Right share

b. One right share for every 4 shares held

Subscription price of right shares

Ex- Right price =

Post right price of share - Issue price of Right share

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Shareholders wealth before right issue

Shareholders wealth after right issue in (a)

Shareholders wealth after right issue in (b)

Current Market price of share

Subscription price for right shares

Post right price per share -

Wealth of shareholder holding 1000 shares

Post right price per share

Wealth before right issue

- Issue price of right share

Wealth of shareholder holding 1000 shares if right is ignored

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Current market Price per share

Post right price per share -

Post right price per share

- Issue price of right share

Wealth of the shareholder who holds 1600 shares

Wealth after right issue if he sells his right

Wealth after right issue if he exercises his right

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

Wealth after right issue

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

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Current market price of share

Subscription Price of Right shares

a. New Money raised

b. Now of rights required to buy 1 new share

Value of one right

Post right price per share -

Post right price per share

Value of one right coupon

- Issue price of right share

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

No. of shares outstanding

a. Current market price of share

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

Funds required for new investment =

Post right price per share