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

1

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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
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

2

5,000

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

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

Post right price of share - Issue price of Right share
12 - 8
4

Value of 1 right
coupon

=

12

=1

3

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

Post right price per share -

=
b.

Value of right

=
=
=

c.

Wealth of shareholder holding 1000 shares

Rs 22.40

Post right price per share
22.40 - 16
Rs 6.40

Wealth before right issue
=
1000 x 24
Wealth after right issue
Shares 1,250 x 22.40
Cash paid for right shares
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
Wealth after right issue
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

4

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Q3

Current market Price per share
Number of shares outstanding
Right shares

=
=
=

Rs 50
10,000
1 :4
= 2,500 shares

Subscription Price
a.

=

Post right price per share -

=
Value of right

b.

Rs 30

=
=
=

Rs 46

Post right price per share
46 - 30
Rs 16

- Issue price of right share

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
Cash paid for right shares
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

Wealth after right issue

=

1,600 x 46 = 73,600

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

5

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

Post right price per share -

=
Value of right

=
=
=

Post right price per share
5.8 - 5
Rs 0.8

Value of one right coupon
d. Ex right price Per share

Rs 5.8

=

=

- Issue price of right share

= 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

6

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Q5

No. of shares outstanding

=

4,00,000

a. Current market price of share
EPS

=

= Rs 20 / share

)

=

8

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 =
Post right price per share -

=
Value of right

=
=
=

Post right price per share
146.67 - 120
Rs 26.67

Value of one right coupon
e.

Rs 146.67

=

- Issue price of right share

= 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

7

= 19.33

=

= 8

Rs 154.64

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

Post right price per share -

=
Value of right

=
=
=

Rs 53.75

Post right price per share
53.75 - 47
Rs 13.75

Value of one right coupon

=

- Issue price of right share

= 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
( 4 crore x 10)
Reserve & surplus
Security premium
2 crore x 30
Net asset value

8

40 crore
120 crore
60 crore
220 crore

(it includes PAT of current year)

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

Post right price per share -

=

PE ratio
Q8

=

= 6.64 times

After Q 10

9

Rs 2.39 per share

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

Q9

Post right price per share -

Value of right =
In one Right share

Post right price per share

Value of One Right coupon

- Issue price of right share

=

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

Post right price per share

=

Given in ques
Value of one right coupon when =
Share is trading ex right

10

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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

If ex right price is 170

=

= 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

If ex right price is 50

=

= 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

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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.
Post right price per share -

=
=
=
=

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

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

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
No. of right shares issued

=

Funds from right issue
6 lakh x 15

=

x 3 = 6 lakh
Rs 90 lakh

i.
Post right price per share -

=
=
=
=

Rs 30.625 per share

ii.

value of rights

Post right Price - Issue price of right share
30.625 - 15
15.625 per share

Iii

% age increase in share capital
Existing share capital
No of shares in Right issue
Increase in share cap

iv

Funds before Right Issue
Funds from right issue 6 lakh x 15
% age increase in funds

=
=
=

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 90 lac x 20%
Total earnings

= Rs 40 lakh
= 20%
= Rs 18 Lakh
= Rs 58 Lakh

EPS

=

Market price on the basis of earnings

=
=

13

=

10 lakh
6 lakh
60%

100 lakh
90 lakh
90%

= 10

= 3.625
PE ratio x EPS
10 x 3.625 = 36.25

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

3.

If right shares are 2 for every 5 shares held , issued at par i.e 20
No. of right shares issued

=

Funds from right issue
4 lakh x 20

=

x 2 = 4 lakh
Rs 80 lakh

i.
Post right price per share -

=
=
=
=

Rs 34.286 per share

ii.

value of rights

Post right Price - Issue price of right share
34.286 - 20
14.286 per share

Iii

% age increase in share capital
Existing share capital
No of shares in Right issue
Increase in share cap

=

iv

Funds before Right Issue
Funds from right issue 4 lakh x 20
% age increase in funds

=
=
=

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

EPS

=

Market price on the basis of earnings

=
=

4.

10 lakh
4 lakh
40%

100 lakh
80 lakh
80%

= 10

=4
PE ratio x EPS
10 x 4 = 40

If right shares are 3 for every 5 shares held , issued at par i.e 25
No. of right shares issued

=

Funds from right issue
2 lakh x 25

=

14

x 1 = 2 lakh
Rs 50 lakh

PRAVINN MAHAJAN CLASSES 9871255244 , 8800684854

i.
Post right price per share -

=
=
=
=

Rs 37.5 per share

ii.

value of rights

Post right Price - Issue price of right share
37.5 - 25
12.5 per share

Iii

% age increase in share capital
Existing share capital
No of shares in Right issue
Increase in share cap

iv

Funds before Right Issue
Funds from right issue 6 lakh x 15
% age increase in funds

=
=
=

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 50 lac x 20%
Total earnings

= Rs 40 lakh
= 20%
= Rs 10 Lakh
= Rs 50 Lakh

EPS

=

Market price on the basis of earnings

=
=

15

=

10 lakh
2 lakh
20%

100 lakh
50 lakh
50%

= 10

= 4.167
PE ratio x EPS
10 x 4.167 = 41.67

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