IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Aarav Textiles Ltd has 10 million ordinary shares in issue, with a market price of Rs 240 each. It makes a rights issue of 1 new share for every 4 held at Rs 200 per share. What is the theoretical ex-rights price per share?
The theoretical ex-rights price is Rs 232. Four existing shares worth Rs 960 plus one new share at Rs 200 give a total value of Rs 1,160 spread over five shares. A simple average of the two prices ignores the weighting and is wrong.
- ARs 232Correct
- BRs 240
- CRs 208
- DRs 220
- Rs 248
Explanation
Take 4 shares at Rs 240 = Rs 960, plus 1 new share at Rs 200 = Rs 200. Total Rs 1,160 over 5 shares gives Rs 232. Rs 220 results from a simple average of 240 and 200 ignoring the 4:1 weighting.
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