Welcome To BBA VISION
Online Class
Capital Market Financing
Necessary Formulas
1. Number of new share issued =
2. Number of New share issued =
Fund to be raised
Subscription price
Existing Share
No. of Rights
3. Fund to be raised = No of New share × SP
4. Number of Rights =
Number of Old share
Number of New share
5. Value of the Firm
= (Number of old share × P0) + (Number of new share × SP)
= Total Number of share × Px
6. Value of a Right (at rights on): R0 =
7. Value of a Right (at ex-right) : Rx =
P0 − SP
N+1
Px − SP
N
(Note: R0 = Rx if another Px is not given.)
R0 = R x = P 0 – P x
Where,
P0 = Value of share at rights on
Px = Value of share at ex-right
SP = Subscription price
N = Number of rights required for a new share
R0 = Value of a right at rights on
Rx = Value of a right at ex-rights.
8. Market Price per share at Ex-right: Px =
(P0 × N) + SP
N+1
9. Total value of Rights for a new share: Total value of rights = R0 × N = Px – SP
10. Required shares for electing Directors under cumulative voting system:
RS =
(DD × NS)
DE + 1
+1
11. Required shares for electing Director under majority voting system:
RS = (NS × 50%) + 1
12. Required share percentage for electing director under cumulative voting system:
RS (%) =
DD × 100%
DE + 1
+1
Here,
DD = Directors desired
DE = Directors to be elected
NS = Number of shares outstanding.
13. Number of directors that can be elected by an individual
No. of directors =
(SW − 1) × (DE + 1)
NS
Problem – 01
[NU. BBA (Hons.) - 2019]
Mr. John has 10,000 equity shares of a company. Recently the company declared a right offering which
5,000 new shares to be issued at Tk. 10 each. At present the company has 1,00,000 shares in market at Tk.
50 per share.
How many shares will be able to purchase by Mr. John under propose right offer?
Solution
Number of rights to purchase a new share:
Number of Old share
Number of Rights (N) = Number of New share
1,00,000
=
5,000
= 20 shares.
Mr. John will be able to purchase:
Equity share
No. of share = No. of Right
=
10,000
20
= 500 shares.
Problem – 02
[NU. BBA (Hons.) - 2019]
TCS has outstanding shares of 5 million with current price of Tk. 100 each. The company wants to raise fund
by Tk. 70 million and the subscription price is Tk. 70 each. Find out –
(a) Number of shares needed to required fund.
(b) How many rights will take to buy one share?
(c) What is the ex-right price?
Solution
Reg. – (a): Number of new shares
=
7,00,00,000
70
Fund to be raised
= Subscription price
= 10,00,000 shares.
Number of Old share
Req. – (b): No. of Rights
= Number of New share
50,00,000
= 10,00,000 = 5 rights.
Req. – (c): Ex-right price of the share: (Px)
=
(100 × 5) + 1
5+1
=
500 + 70
6
=
570
6
=
(P0 × N) + SP
N+1
= Tk. 95.
Problem – 03
[NU. BBA (Hons.) – 2017]
The stock of Mays Company is being sold for Tk. 200. The company wants to issue rights to subscribe for
one additional at Tk. 175 for each of 10 held. What will be the theoretical value of (a) a right when the
stock is selling rights or (b) Market price of a share when it goes ex right?
Solution
Required (a):
Value of right on or before ex-right:
Where,
P0 = Market price per share on rights = Tk. 200
S = Subscription price = Tk. 175
N = Number of rights required to purchase a new share = 10
R0
=
=
P0 − SP
N+1
200 − 175
10 + 1
=
25
11
= Tk. 2.27
Required (b): Market price per share to ex-right or after the rights:
(Px)
=
=
(P0 × N) + SP
N+1
(200 × 10) + 175
10 + 1
=
2175
11
= Tk. 197.73
Problem – 04
[NU. BBA (Hons.) – 2019]
Barnamala Trading Ltd. is proposing a right offering. Presently the enterprise has 4,00,000 shares
outstanding at Tk. 75 each and it wants to issue 70,000 shares at Tk. 60 each.
Requirements:
(a) What is the new market value of the company?
(b) How many rights are associated with one of the new shares?
(c) What is the ex-right price of share?
(d) What is the value of a right?
(e) Why should Barnamala Trading Ltd. like right offering rather than general cash offer?
Solution
(a) The new market value of the company:
= (Shares outstanding × Old price) + (New shares × New price)
= (4,00,000 × Tk. 75) + (70,000 × Tk. 60)
= Tk. 3,00,00,000 + Tk. 42,00,000
= Tk. 3,42,00,000
(b) Number of rights required to buy a new share:
N
Number of Outstanding shares
= Number of New shares offered
4,00,000
= 70,000 = 6 rights. (Approx.)
(c) The ex-right share price:
Here,
P0 = Tk. 75
N=6
(Px)
=
=
=
S = 60
Px = Ex-right share price = ?
(P0 × N) + SP
N+1
(75 × 6) + 60
6+1
510
7
= Tk. 72.86.
(d) Value of a right:
R
P −S
= N0− 1
75 − 60
= 6−1
15
= 5 = Tk. 3.
Problem – 05
[NU. BBA (Hons.) – 2019]
The Big Boss Corporation has announced a rights offer to raise TK 30,00,000 for a new journal, the journal
of financial express. This journal will review potential articles after the author pays a non-refundable
reviewing fee of Tk. 3,000 per page. The stock is selling Tk. 60 per share currently and there are 2,40,000
shares outstanding
(a) If the subscription price is set Tk. 50 per share, how many shares must be sold?
(b) How many rights will it take to buy one share?
(c) What is the ex-right price?
(d) What is the value of a right?
(e) Show how a shareholder with 1,000 shares before the offering and no desire to buy additional shares is
not harmed by the right offer.
Solution
(a) No. of new share needed =
=
30,00,000
50
Fund to be raised
Subscription price
= 60,000 shares.
Old share
(b) No. of Rights needed
= New share
2,40,000
= 60,000 = 4 rights.
(c) Ex-right price of the share: (Px)
=
(60 × 4) + 50
4+1
=
240 + 50
5
=
=
(P0 × N) + S
N+1
290
5
= Tk. 58.
P −S
(d) R0 = N0+ 1
60 − 50
10
= 4 + 1 = 5 = Tk. 2.
(e) Before offer portfolio
After offer portfolio
Rights (1,000 × 2)
60,000
Capital (1,000 × 60) = 60,000
Capital (1,000 × 58) = 58,000
= 2,000
Problem – 06
[NU. BBA (Hons.) - 2012, 18]
Moni Cotton Lid. has 50,000 shares outstanding. The stock sells for Tk. 40 per share. To raise Tk. 5,00,000
for a new partial accelerator. The firm is considering a rights offering at Tk. 25 per share.
Required:
(a) No. of new issued share.
(b) No. of rights needed to buy a new share.
(c) Value of right before ex-right.
Solution
(a) No. of new issued share
=
5,00,000
25
Fund to be raised
= Subscription price
= 20,000 shares.
(b) No. of Rights to buy a new share =
=
Number of present share
Number of New share
50,000
20,000
P0 − S
(c) Value of right before ex-right: R0 = N + 1
40 − 25
= 2.5 shares
15
= 2.5 + 1 = 3.5 = Tk. 4.26.
Problem – 07
[DU. BBA (Hons.) – 2015]
The shareholders of GP mobile company need to elect seven new directors. There are 20,00,000 share
outstanding. How many share do you need to be certain that –
(a) You can elect all directors under majority voting system?
(b) You can elect at least one director under cumulative voting system?
(c) You can elect 4 directors under cumulative voting system?
Solution
Required – (a):
Number of shares needed to elect all directors under majority voting system:
RS
= (NS × 50%) + 1
= (20,00,000 × 50%) + 1
= 10,00,000 + 1 = 10,00,001
Required – (b):
Number of share needed to elect a director and cumulative voting system:
Here,
DD = 1
DE = 7
NS = 20,00,000
RS
=
=
=
(DD × NS)
+1
DE + 1
(1 × 20,00,000)
7+1
20,00,000
8
+1
+1
= 2,50,000 + 1 = 2,50,001
Required – (c):
NS needed to elect 4 directors under cumulative voting system:
NS
=
=
4 × 20,00,000
7+1
80,00,000
8
+1
+1
= 10,00,000 + 1 = 10,00,001
Problem – 08
[NU. BBA (Hons.) – 2016]
You have 10 shares of ABC corporation. The current market price of the stock is Tk. 50. You also have Tk. 80
in cash. You have just received a news of rights offering from the company. One new share can be purchased
at Tk. 40 for each five shares currently owned by you.
(a) What is the value of a right?
(b) What is the value of share at ex-right?
(c) What is the value of your assets before rights offering?
(d) What will be the value of your assets if you participate in the right offering?
(e) What will be the value of your assets if you sell the rights?
(f) What will be the value of your assets if you do not exercise your right?
Solution
Required (a):
Value of a right:
Here,
P = Tk. 50
R0
SP = Tk. 40
P0 − S
= N+1
50 − 40
10
= 5 + 1 = 6 = Tk. 1.6667.
Required (b):
Value of a share at ex-right:
N=5
(Px)
=
=
=
(P0 × N) + SP
N+1
(50 × 5) + 40
290
6
5+1
= Tk. 48.333
Required (c)
Value of assets before rights:
Value of assets
= (NS × P0) + Cash
= (10 × 50) + 80
= Tk. (500 + 80)
= Tk. 580
Required (d):
Value of assets when rights are exercised:
Here,
NS1 = Old share + Share getting from right = 10 + 2 = 12
Px × NS1 = 48.333 × 12
= Tk. 580
Required (e):
Value of assets when rights are sold:
= (Px × NS) + (Value of night) + Cash
= (48.333 × 10) + (10 × 1.6667) + 80
= 483.33 + 16.67 + 80
= Tk. 580
Required (f):
Value of assets is rights are not exercised:
= (Px × NS) + Cash
= (48.333 × 10) + 80
= 483.33 + 80
= TK. 563.33
Problem – 09
[NU. BBA (Hons.) – 2016]
Saniat corporation is planning to market a new product. To finance the venture is proposed to make a right
issue at Tk. 10 of one new share for each two shares held. The company currently has outstanding 1,00,000
shares priced at Tk. 40 per share. Assuming that the new money is invested to earn a fair return, find the
values for the following:
(a) Number of new issued shares.
(b) Number of rights needed to buy one share.
(c) Amount of new investment.
(d) Total value of the company after issue.
(e) Total number of shares after issue.
Solution
(a) We know that,
Number of new issued shares
No. of Old shares
= No. of rights foe a new share
=
1,00,000
2
= 50,000 shares.
(b) 2(two) rights are needed to buy one new share.
(c) We know that,
Amount of new investment = Number of new shares × Subscription price
= 50,000 × Tk. 10
= Tk. 5,00,000
(d) Total value of the company after issue
= Value of old shares + Value of new shares
= (1,00,000 × Tk. 40) + (50,000 × Tk. 10)
= Tk. 40,00,000 + Tk. 5,00,000
= Tk. 45,00,000
(e) Total number of shares after issue
= Number of old shares + Number of New shares
= 1,00,000 + 50,000
= 1,50,000 shares.
Problem – 10
Your company has a nine person board and 2,00,000 shares outstanding in the market. The company is
chartered with cumulative voting system. You owned 48,200 shares. You disagree with present
management so you want to elect of your own directors on the board.
i. If all directors are elected once a year, how many directors can be selected by you ?
ii. If 3 directors are selected each year, how many directors can be selected by you ?
Solution:
i.
We know,
under cumulative voting system,
(𝑆𝑊−1)×(𝐷𝐸×1)
No. of directors elected =
𝑁𝑆
=
(48,200−1)×(9×1)
2,00,000
= 2.41
So 2 directors can be elected by you.
ii.
Directors elect =
(48,200−1)×(3×1)
2,00,000
= .96
So no director can be elected.
Problem – 11
Mr. Rahim is a discounted stockholder of Square company Ltd. The company has 2,00,000 shares
outstanding.
i. How many share would Mr. Rahim have to control to be assured one directorship under majority voting
rule out of 10 directors.
ii. How many shares would he have to control 2 directorship under cumulative voting system out of 10
directors.
iii. What would be the number of shares to elect 1 directors out of 4.
Solution:
i. Majority voting System:
Required shares = (NS ×50%)+1
= (2,00,000 × 50%) + 1
= 1,00,001
ii. Cumulative voting system:
𝐷𝑆 ×𝑁𝑆
Required Shares = ( 𝐷𝐸 +1 ) + 1
2 ×2,00,000
= ( 10 +1 ) + 1
= 36,364
1 ×2,00,000
iii. Required Shares = ( 4 +1
= 40,001
)+1
Problem – 12
Global Enterprise is considering a rights offering to raise Tk. 50 crore. Currently this firm has 2.5 crore share
selling for Tk. 50 per share. The subscription price on the new share would be Tk 40 per share.
a. How many share must be sold to raise the funds?
b. How many rights are necessary to purchase a share ?
Solution:
𝐹𝑢𝑛𝑑 𝑡𝑜 𝑏𝑒 𝑟𝑎𝑖𝑠𝑒𝑑
a. Number of New share = 𝑆𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒
=
50 𝐶𝑟𝑜𝑟𝑒
40 𝑇𝑘
= 1.25 Crore share
b. Number of rights to purchase a new share
N=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒
𝑁𝑒𝑤 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒
2.5 𝑐𝑟𝑜𝑟𝑒
= 1.25 𝑐𝑟𝑜𝑟𝑒
= 2 Share
Problem – 13
You are supplied the following information to calculate:
DU-7clg-2020
i) Number of share needed.
ii) How many rights will take to buy one share?
iii) What is the Ex-right price?
iv) What is the value of a right?
Outstanding shares 50,000. Current market price Tk. 75 . The company needs to raised fund by tk.
7,00,00,000 . Subscripting price Tk. 70 per share.