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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

Sundaram Textiles Ltd has 4,000,000 shares in issue with a market price of Rs 150 each. It makes a 1-for-4 rights issue at Rs 100 per share. What is the theoretical ex-rights price per share?

The theoretical ex-rights price is Rs 140. Four existing shares worth Rs 150 each total Rs 600; adding one new share at Rs 100 gives Rs 700 for five shares, so the weighted average value per share is Rs 140.

  1. ARs 140Correct
  2. BRs 150
  3. CRs 125
  4. DRs 130
  5. Rs 145

Explanation

Four old shares at Rs 150 = Rs 600, plus one new share at Rs 100 = Rs 700 for five shares. Rs 700/5 = Rs 140. Rs 145 would come from wrongly averaging Rs 150 and Rs 140 incorrectly, and Rs 125 is the simple average of 150 and 100.

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