An RTA checks a rights entitlement
Series II-A practice case · 4 questions · 1 mark each
Question 1 of 4Case practice
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An investor owns 400 fully paid shares. A fictional rights issue offers one new share for every four shares held at a subscription price of ₹80. The share trades cum-rights at ₹100. Assume the investor is eligible for all 400 shares and no fractional entitlement arises. For this simplified calculation, theoretical ex-rights price equals the old shares’ market value plus the rights subscription cash, divided by the combined number of shares after full subscription. Ignore taxes, fees, changes in business value and market movements unrelated to the issue. In the final question, consider the alternative where the investor neither subscribes nor sells any entitlement.
The rights ratio and prices are fictional.
The theoretical price is an arithmetic model, not a market-price guarantee.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
An investor owns 400 fully paid shares. A fictional rights issue offers one new share for every four shares held at a subscription price of ₹80. The share trades cum-rights at ₹100. Assume the investor is eligible for all 400 shares and no fractional entitlement arises. For this simplified calculation, theoretical ex-rights price equals the old shares’ market value plus the rights subscription cash, divided by the combined number of shares after full subscription. Ignore taxes, fees, changes in business value and market movements unrelated to the issue. In the final question, consider the alternative where the investor neither subscribes nor sells any entitlement.
The rights ratio and prices are fictional.
The theoretical price is an arithmetic model, not a market-price guarantee.
Q1How many new shares is the investor entitled to subscribe for?
Option A. 400 shares
Why it is wrong: This treats a one-for-four entitlement as one-for-one.
Option B. 80 shares
Why it is wrong: This confuses the subscription price with a share quantity.
Option C. 100 shares — Correct answer
Option D. 1,600 shares
Why it is wrong: This reverses the ratio.
Answer: C. Entitlement = 400 ÷ 4 = 100 new shares. There is no fraction under the supplied terms. Remember: Read rights ratios as new shares per existing shares.
Hint, shown before you answer in practice mode: Divide existing shares by four.
IIA-P-C01-Q1easynumerical
Q2What cash is required to take up the full entitlement?
Option A. ₹32,000
Why it is wrong: This applies the subscription price to all existing shares.
Option B. ₹8,000 — Correct answer
Option C. ₹10,000
Why it is wrong: This uses the cum-rights price rather than the subscription price.
Option D. ₹40,000
Why it is wrong: This is the cum-rights value of the old holding.
Answer: B. Subscription cash = 100 × ₹80 = ₹8,000. Existing shares do not require a new subscription payment. Remember: Subscription cash depends on new shares and the issue price.
Hint, shown before you answer in practice mode: Multiply the entitlement by ₹80.
IIA-P-C01-Q2mediumnumerical
Q3What is the theoretical ex-rights price after full subscription?
Option A. ₹90
Why it is wrong: This takes an unweighted average of ₹100 and ₹80.
Option B. ₹80
Why it is wrong: This uses only the subscription price.
Option C. ₹96 — Correct answer
Option D. ₹100
Why it is wrong: This ignores the lower-priced new issue in the weighted average.
Answer: C. Theoretical ex-rights price = (400 × ₹100 + 100 × ₹80) ÷ 500 = ₹96. The old and new shares need their correct weights. Remember: Theoretical ex-rights pricing uses a weighted average.
Hint, shown before you answer in practice mode: Divide combined theoretical value by 500 shares.
IIA-P-C01-Q3mediumnumerical
Q4If the investor lets the entitlement lapse without sale, what is the theoretical fall in the value of the old 400-share holding?
Option A. ₹1,600 — Correct answer
Option B. ₹8,000
Why it is wrong: This is the subscription cash that would have been required.
Option C. ₹4,000
Why it is wrong: This assumes an ex-rights price of ₹90.
Option D. Zero
Why it is wrong: This ignores the theoretical price adjustment when rights value is not captured.
Answer: A. The old holding falls by 400 × (₹100 − ₹96) = ₹1,600 in the simplified model. Taking up or selling an entitlement would involve a different cash-flow position. Remember: An unused entitlement can have an economic cost even without a cash payment.
Hint, shown before you answer in practice mode: Compare 400 shares at ₹100 with 400 at the calculated ₹96.
IIA-P-C01-Q4hardnumerical
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