A rights issue and an investor’s choices
Series X-A case study · set 2, case 4 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
0 right · 0 wrong · 5 to go
The case · stays here for all 5 questions
Ojas owns 1,000 shares of a company trading cum-rights at ₹120. The company offers one new share for every four old shares held, at a subscription price of ₹80. Assume the full issue is ultimately subscribed, including any lapsed entitlement allotted to other investors or underwriters. The theoretical ex-rights price reflects only the new cash and increased share count. There are no market moves, taxes, charges or fractional entitlements. Ojas compares subscribing with letting his entitlement lapse without compensation. For a separate wealth check, subtract any new subscription cash from the value of his post-issue holding. These are theoretical calculations, not a forecast of the actual traded price.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Ojas owns 1,000 shares of a company trading cum-rights at ₹120. The company offers one new share for every four old shares held, at a subscription price of ₹80. Assume the full issue is ultimately subscribed, including any lapsed entitlement allotted to other investors or underwriters. The theoretical ex-rights price reflects only the new cash and increased share count. There are no market moves, taxes, charges or fractional entitlements. Ojas compares subscribing with letting his entitlement lapse without compensation. For a separate wealth check, subtract any new subscription cash from the value of his post-issue holding. These are theoretical calculations, not a forecast of the actual traded price.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1How many new shares may Ojas subscribe for?
Option A. 200 shares
Why it is wrong: This divides by the post-issue five-share group instead of the four old shares.
Option B. 250 shares — Correct answer
Option C. 1,000 shares
Why it is wrong: This treats the issue as one-for-one.
Option D. 4,000 shares
Why it is wrong: This reverses the one-for-four ratio.
Answer: B. 1,000 ÷ 4 = 250 new shares. Remember: Rights entitlements are based on the stated ratio and eligible holdings.
Hint, shown before you answer in practice mode: Apply the rights ratio to his existing shares.
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Q2How much subscription cash is required?
Option A. ₹30,000
Why it is wrong: This uses the cum-rights market price.
Option B. ₹28,000
Why it is wrong: This uses the theoretical ex-rights price.
Option C. ₹80,000
Why it is wrong: This applies the subscription price to all old shares.
Option D. ₹20,000 — Correct answer
Answer: D. 250 × ₹80 = ₹20,000. Remember: Rights subscription cash uses the offer price, not the market price.
Hint, shown before you answer in practice mode: Use the number of new shares and the subscription price.
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Q3What is the theoretical ex-rights price?
Option A. ₹80
Why it is wrong: This is only the subscription price.
Option B. ₹120
Why it is wrong: This ignores the discounted new issue.
Option C. ₹112 — Correct answer
Option D. ₹100
Why it is wrong: This gives equal weights to old and new share prices.
Answer: C. (4 × ₹120 + ₹80) ÷ 5 = ₹112 per share. Remember: Theoretical ex-rights value weights old capital and new cash by share count.
Hint, shown before you answer in practice mode: A four-old-share group adds one new share and ₹80 cash.
XA-S2-C04-Q3mediumnumerical
Q4If Ojas subscribes fully, what is his post-issue holding value less the new cash paid?
Option A. ₹1,20,000 — Correct answer
Option B. ₹1,40,000
Why it is wrong: This is the holding value before subtracting subscription cash.
Option C. ₹1,12,000
Why it is wrong: This uses only his old share count.
Option D. ₹1,00,000
Why it is wrong: This deducts the subscription cash twice.
Answer: A. 1,250 × ₹112 − ₹20,000 = ₹1,20,000, equal to the original theoretical wealth. Remember: A rights issue does not create free wealth merely by adding shares.
Hint, shown before you answer in practice mode: After subscribing he owns 1,250 shares.
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Q5If he lets the entitlement lapse without compensation, what theoretical value is lost?
Option A. ₹8,000 — Correct answer
Option B. ₹30,000
Why it is wrong: This is the new shares valued at the old price.
Option C. ₹20,000
Why it is wrong: This is the cash he chose not to subscribe.
Option D. ₹0
Why it is wrong: The discounted issue reduces the value of his unchanged holding.
Answer: A. 1,000 × (₹120 − ₹112) = ₹8,000. The case assumes no proceeds from selling the entitlement. Remember: Ignoring a valuable rights entitlement can reduce an existing holder’s wealth.
Hint, shown before you answer in practice mode: Compare the value of his unchanged 1,000 shares before and after.
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A protective put on an existing holding
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