Lesson eLearning

A company has 2,00,000 equity shares of face value ₹100 each. It announces a rights issue of 1 new share for every 4 existing shares at a subscription price of ₹80 per share. The underwriting commission is 2% of the issue size. Calculate: (i) entitlement ratio, (ii) theoretical ex‑right price (TERP), (iii) total amount raised, and (iv) net proceeds after deducting the underwriting commission.

hard 4 marks Class 12 · Business Studies · Financial Markets
Answer
(i) 1:4, (ii) ₹92, (iii) ₹4,00,000, (iv) ₹3,92,000

The correct answer is (i) 1:4, (ii) ₹92, (iii) ₹4,00,000, (iv) ₹3,92,000 — Net proceeds = Total raised – Commission = ₹4,00,000 – ₹8,000 = ₹3,92,000.

Step-by-step solution

  1. Entitlement ratio = number of rights offered ÷ number of existing shares = 1 ÷ 4 = 1:4.
  2. Calculate the number of new shares = 2,00,000 ÷ 4 = 50,000 shares.
  3. Compute total market value of existing shares = 2,00,000 × ₹100 = ₹2,00,00,000.
  4. Compute total amount to be raised from rights issue = 50,000 × ₹80 = ₹4,00,000.
  5. Use TERP formula: TERP = (Market value of old shares + Amount raised) ÷ (Old shares + New shares).
  6. Substitute values: TERP = (₹2,00,00,000 + ₹4,00,000) ÷ (2,00,000 + 50,000) = ₹2,04,00,000 ÷ 2,50,000 = ₹92.
  7. Total amount raised is already found as ₹4,00,000.
  8. Underwriting commission = 2% of issue size = 0.02 × ₹4,00,000 = ₹8,000.
  9. Net proceeds = Total raised – Commission = ₹4,00,000 – ₹8,000 = ₹3,92,000.
Common mistake: Omitting the subscription price while calculating TERP or forgetting to add the amount raised to the market value of old shares

Concept tested: Rights issue and TERP calculation

Published · How this solution was prepared and checked

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