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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Vihaan Pharma Ltd has 20 lakh equity shares of Rs 10 each, fully paid. It makes a rights issue of 1 share for every 4 held at Rs 120 per share. The cum-rights market price is Rs 170. What is the theoretical ex-rights price per share?

The theoretical ex-rights price is Rs 160. Four shares at Rs 170 are worth Rs 680, adding one new share at Rs 120 gives Rs 800, and dividing by five shares yields Rs 160 per share.

  1. ARs 160Correct
  2. BRs 150
  3. CRs 158
  4. DRs 170

Explanation

For 4 shares held, value = 4 x 170 = 680. Add one new share at 120 gives 800 for 5 shares. TERP = 800/5 = Rs 160. Check: value of a right = 170 - 160 = 10, equal to (160 - 120)/4 = 10. Rs 158 comes from a wrong weighting and Rs 150 from a simple average of 170 and 130.

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