Understanding Rights Issue Calculation for Public Company

This question involves calculating the number of rights required to purchase a new share during a rights issue by a public limited company. A rights issue is a way for companies to raise additional funds by offering new shares to their existing shareholders in proportion to their current shareholding.

The key information provided is:

• Number of shares outstanding (existing shares): 9,00,000
• Current market price per share: Rs. 130
• Amount needed for the new project: Rs. 2.25 crores (which is Rs. 2,25,00,000)
• Rights issue subscription price per share: Rs. 75

We need to determine the ratio of existing shares to new shares issued, which will tell us how many rights an existing shareholder needs to use to buy one new share at the subscription price.

Step 1: Calculate the Number of New Shares to be Issued

The company needs to raise Rs. 2,25,00,000 and is issuing shares at a subscription price of Rs. 75 each. The total number of new shares to be issued is calculated by dividing the total amount needed by the subscription price per share.

Total amount needed \( = \text{Rs. } 2,25,00,000 \)

Subscription price per share \( = \text{Rs. } 75 \)

Number of new shares \( = \frac{\text{Total amount needed}}{\text{Subscription price per share}} \)

Number of new shares \( = \frac{2,25,00,000}{75} \)

Let's perform the calculation:

So, the company will issue 3,00,000 new shares through the rights issue.

Step 2: Determine the Ratio of Existing Shares to New Shares

The rights issue is offered to existing shareholders based on their current holdings. To find out how many existing shares correspond to the right to buy one new share, we compare the total number of existing shares with the total number of new shares being issued.

Number of existing shares outstanding \( = 9,00,000 \)

Number of new shares to be issued \( = 3,00,000 \)

Ratio of Existing Shares to New Shares \( = \frac{\text{Number of existing shares}}{\text{Number of new shares}} \)

Ratio \( = \frac{9,00,000}{3,00,000} \)

Let's perform the calculation:

The ratio is 3:1. This means for every 3 existing shares held by a shareholder, they are entitled to subscribe to 1 new share in the rights issue.

Step 3: Relate the Ratio to Rights Required

Each existing share typically carries one 'right'. Therefore, if a shareholder needs to hold 3 existing shares to be eligible to buy 1 new share, they will possess 3 rights. These 3 rights are required to subscribe for one new share at the Rs. 75 price.

Number of existing shares for 1 new share entitlement \( = 3 \)

Number of rights per existing share \( = 1 \)

Number of rights required to purchase a new share \( = \text{Number of existing shares for entitlement} \times \text{Rights per share} \)

Number of rights required \( = 3 \times 1 = 3 \)

Therefore, three rights are required to purchase a new share in this rights issue.

Conclusion on Rights Required

Based on the calculations, the ratio of existing shares to new shares is 3:1. This ratio directly translates to the number of rights needed. An investor holding 3 shares gets the right to buy 1 new share. Since each share gives one right, 3 rights are needed to buy 1 new share.

The final answer is three rights.

Revision Table: Key Calculations in Rights Issue

Additional Information on Rights Issues and Finance

A rights issue is a method used by companies, including public limited companies, to raise capital. It gives existing shareholders the preemptive right to purchase new shares, typically at a price lower than the current market price. This is done to prevent dilution of ownership for existing shareholders who wish to maintain their proportion of ownership in the company.

• Cum-rights price: The market price of the share before the rights issue begins (Rs. 130 in this case).
• Ex-rights price: The expected market price of the share after the rights issue is completed. This price is generally lower than the cum-rights price because of the increase in the total number of shares and the lower subscription price.
• Value of a right: This can be calculated and represents the theoretical gain per existing share due to the rights issue. It is the difference between the cum-rights price and the ex-rights price. The formula for the theoretical value of a right is: \( \text{Value of a Right} = \frac{\text{Cum-rights price} - \text{Subscription price}}{\text{Ratio (Existing:New)} + 1} \) In this case: \( \frac{130 - 75}{3 + 1} = \frac{55}{4} = \text{Rs. } 13.75 \) per right.
• Existing shareholders have options: they can exercise their rights and buy new shares, sell their rights in the market (if transferable), or let their rights lapse (which means they lose the opportunity to buy at the lower price and face potential ownership dilution).
• The subscription price (Rs. 75) is set below the current market price (Rs. 130) to incentivize existing shareholders to subscribe to the rights issue.

Understanding these concepts helps in analyzing how a rights issue impacts shareholders and the company's capital structure and finance.