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

Orion Ltd has 2,00,000 equity shares of Rs 10 each. It makes a rights issue of 1 share for every 2 held at Rs 30 per share. The cum-rights price is Rs 60. Shareholder Mr Sharma holds 1,000 shares and sells all his rights entitlement at the theoretical value of the right rather than subscribing. What amount does he receive, and what is the number of rights shares he was entitled to?

He receives Rs 10,000 and was entitled to 500 shares. The ex-rights price is (2x60+30)/3 = Rs 50, so each right per share held is worth Rs 10, and 1,000 shares give Rs 10,000. The entitlement is 1 for 2, so 500 shares.

  1. ARs 10,000 for 500 sharesCorrect
  2. BRs 15,000 for 500 shares
  3. CRs 10,000 for 1,000 shares
  4. DRs 30,000 for 500 shares

Explanation

Entitlement = 1,000 x 1/2 = 500 shares. Ex-rights price = (2 x 60 + 1 x 30)/3 = 150/3 = Rs 50. Value of right per share held = 60 - 50 = Rs 10, so per entitled new share = Rs 20. Value for 500 shares = 500 x 20 = Rs 10,000, which also equals 1,000 x 10. Rs 15,000 comes from wrongly using (60-30)/2.

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