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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Sharma Auto Ltd. has 5,00,000 shares with a current market price of ₹120. A new project is expected to raise the market value of the firm's equity by ₹36,00,000 after the announcement, the project requiring no new shares. By how much does the share price increase, and what is the resulting new market capitalisation?

Existing capitalisation is ₹6 crore (5 lakh × ₹120). Adding the ₹36 lakh gain gives ₹6.36 crore, and spreading ₹36 lakh over 5 lakh shares raises the price by ₹7.20 to ₹127.20. That is the wealth created for shareholders.

  1. AIncrease ₹7.20; new capitalisation ₹6,36,00,000Correct
  2. BIncrease ₹36; new capitalisation ₹6,36,00,000
  3. CIncrease ₹7.20; new capitalisation ₹6,00,00,000
  4. DIncrease ₹72; new capitalisation ₹9,60,00,000

Explanation

Current market capitalisation = 5,00,000 × 120 = ₹6,00,00,000. Adding ₹36,00,000 gives ₹6,36,00,000. Increase per share = 36,00,000 / 5,00,000 = ₹7.20, and the new price is ₹127.20; check 127.20 × 5,00,000 = ₹6,36,00,000. Option B mistakes the lakh figure for a per-share figure.

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