Question
Avinash Ltd needs approves to raise capital through
rights issue to its existing shareholders in the ratio of 1:2. If, the market value of the share is Rs. 220 and the company is offering one share of Rs. 160 each under rights issue, what is the value of the right offered by the company?Solution
Value of right = Market price – average value of each share including the rights share To calculate average value of share including rights Value of 2 existing shares = 2*220 = Rs.440 Value of each rights share = 1*160 = Rs.160 Value of 3 shares = 600 Average value of each share (including rights) = 600/3 = Rs.200 Thus, value of right = market value – average value = 220-200 = Rs.20
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