Question

Investors of RIL have a chance to buy RIL shares at Rs 1,257 as compared to its present market price of Rs 1,433. Existing shareholders who held RIL shares in their demat account on May 14 are eligible to apply for the issue in 1:15 ratio. This means for every 15 shares held by them they can apply for one share at Rs 1,257 apiece. Also, you do not have to pay the entire Rs 1,257 at one go. At the time of application, you have to pay 25% of the amount i.e. Rs 314.25, another 25% of the amount i.e. will be paid by the investor in May 2021 (after 12 months)and the remaining 50% i.e. Rs 628.50 will be paid in November 2021(after 18 months) on-call by the company.If discount rate is 10% what will be effective cost for this plan

Answer 1

Answer:

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Answer 2

Answer:

Theoretical value or the effective cost of the plan is Rs. 18.02.

Explanation:

Method 1:

The present value of the installments of the share price is the effective cost per share of the plan.

The first payment of Rs. 314.25 today

Second payment of Rs. 314.25, 1 year from today

Third payment of Rs. 628.50, 1.5 years from today

Sum of the present value of these payments is therefore:

$\begin{aligned}&=R s .314 .25+R s .285 .681818181818+R s .544 .77385212805\\&=R s .1,144.70567030987\end{aligned}$

Theoretical value of the rights is the effective cost of the plan. It can be calculated using the below formula:

$\begin{aligned}\text { Theoretical Value } &=\frac{(\text { Stock Price }-\text { Rights subscription price per share })}{(\text { No. of shares required to buy one share }+1)} \\&=\frac{(R s .1433-R s .1144 .70567030987)}{(15+1)} \\&=R s .18 .0183956056331\end{aligned}$

Answer: Theoretical value or the effective cost of the plan is Rs. 18.02.

Method 2:

Present value of an amount to be received or paid in future can be calculated by discounting that amount by the required rate of return.

Computation of effective cost of share:

Thus, effective cost is rs. 1,144.70567031.