CMA Intermediate · Financial Management and Business Data Analytics · Capital Market
Sundaram Textiles Ltd makes a rights issue of 1 new share for every 4 shares held, at Rs 120 per share. The cum-rights market price is Rs 160 per share. What is the theoretical ex-rights price per share?
The theoretical ex-rights price is Rs 152. Four old shares worth Rs 640 plus one new share at Rs 120 give total value of Rs 760 spread over five shares. A simple average of the two prices would ignore the 4:1 weighting and be wrong.
- ARs 152Correct
- BRs 140
- CRs 144
- DRs 128
Explanation
For 4 shares at Rs 160 = Rs 640, plus 1 new share at Rs 120 gives Rs 760 for 5 shares. Ex-rights price = 760/5 = Rs 152. Rs 140 results from a simple average of 160 and 120, ignoring the 4:1 weighting.
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