right and scrip issue

Q. A company’s share price stands at Rs. 20. The company has 20m shares in issue and the face value per share Rs. 5. The company intends to capitalize Rs. 100m of reserves by a scrip issue and then to make a 1 for 2 right issue at Rs. 8 per share. Calculate the theoretical price of the share after both the scrip issue and the rights issue?

A) Rs. 8
B) Rs. 9.33
C) Rs.13.33
D) None of the above

How to calculate this?

Thanks

 

The scrip issue converts 100m = 20m shares at 5 each. So it is a 1 for 1 issue, and the share price should halve to 10.

The rights issue then is (1 x 10 + 2 x 8)/3 = 8.67

So, D) none of the above?

Oops -- just realised it's 1 for 2 (not 2 for 1) - so
(2 x 10 + 1 x 8)/3 = 9.33 ie B

 

Hm...
100m converted into Rs. 5 shares will give me a total of 20m shares..therefore the total no. of shares will be 40+20=60

But due to this conversion the value of shares in the market will fall to half of the current value .i.e. 10. Now, 40 shares @ 10 and 20 @ 8

The value of shares after both scrip and rights issue should be

(40*10+20*8)/60 which comes to 9.33

So, i think the answer is B)

I may be wrong... but i think this is the rite answer. Did u check the solution?

 

Thanks guys. But I figured it out. The only thing that bothered me was that at what price was the scrip issue made.

Can companies capitalize only the nominal value of shares? For capitalising 100m, cant it issue 10m shares at a price of 10? Then put 5 in share capital and 5 in share premium?

Hope I did not make a fool out of myself!

 

I dont think so.

In the books, you always value your shares at par value.
And scrip issue converts retained earnings into share capital. If you use current market value then you get 5m in the share premium account and your retained earnings is not exactly converted into share capital i.e share capital will only be 5m instead of 10m.

So, according to me, scrip issue is generally valued at par value.

Hope this helped.

 

Yes Jack. I figured it few minutes after posting the doubt. It was very stupid doubt to ask, given that share premium account is already a component of reserves. No point in taking something from the reserves and putting it back there.

Thanks anyway. Hope you had a good laugh!