CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management
Kaveri Auto Ltd has 10,00,000 shares with market price Rs 120. Management considers a project which, if accepted, is expected to raise the total market value of equity by Rs 1,50,00,000 on announcement, after allowing for its cost. It also plans to buy back no shares. Assuming the market is efficient and the gain accrues wholly to existing shareholders, what is the expected share price after announcement?
Market capitalisation is Rs 12 crore; adding the Rs 1.5 crore value created gives Rs 13.5 crore. Spread over 10 lakh shares, the expected price is Rs 135, an increase of Rs 15 per share.
- ARs 135Correct
- BRs 125
- CRs 150
- DRs 120
Explanation
Current market value = 10,00,000 x 120 = Rs 12,00,00,000. Added value Rs 1,50,00,000 gives Rs 13,50,00,000. Divide by 10,00,000 shares = Rs 135. Rs 150 wrongly adds the whole gain per share as if there were 1,00,000 shares; Rs 125 uses Rs 50 lakh.
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