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CMA Intermediate · Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Kaveri Ltd has 1,00,000 equity shares of Rs 10 each. It offers rights shares in the ratio 1:4 at Rs 40 per share. The cum-rights market price is Rs 80 per share. What is the theoretical value of one right (value of the right per share held)?

The value of a right is Rs 8 per share held. Ex-rights price is (4x80 + 40)/5 = Rs 72, and the cum-rights price of Rs 80 less Rs 72 gives Rs 8. The holding is 5 shares after the 1:4 offer.

  1. ARs 8Correct
  2. BRs 10
  3. CRs 32
  4. DRs 16

Explanation

For every 4 shares held, the holder is offered 1 new share, so 5 shares in all. Theoretical ex-rights price = (4 x 80 + 1 x 40)/5 = 360/5 = Rs 72. Value of the right per share held = 80 - 72 = Rs 8. Rs 10 is wrong because it ignores the number of shares in the combined holding and takes (80-40)/4.

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