Question

4. Raygold Ltd. has a paid-up equity share capital of Rs. 200 lakhs represented by 4 lakh shares of Rs. 50
each. Earnings after tax in the most recent year (2015-16) were Rs. 80,00,000 of which Rs. 26,50,000 was
distributed as dividend. The current price/ earning ratio of these shares as reported in the financial year is 8.
The Company, Raygold Ltd. is planning a major investment that will cost Rs. 240 lakhs and is expected to
produce after-tax earnings over the foreseeable future at a rate of 15% on the amount invested. The necessary
finance is to be raised by a rights issue to the existing shareholders at a price 25% below the current market
price of the Company's shares.
I
You are required to calculate:
(i) the current market price of the shares already in issue,
(11) the price at which the rights issue will be made;
(111) the number of new shares that will be issued:
(iv) the value of the rights;
(v) the price at which the shares of the Company should theoretically be quoted on completion of the rights
issue (i.e., the ex-rights price), ignoring incidental and transaction costs. Assuming that- the rate of return
on existing funds is 12.5% and the market accepts the Company's forecast of incremental earnings.​

Answer 1

Answer:

I

Explanation:

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