A Ltd. has a share capital of 5,000 equity shares of Rs. 100 each having a market value of Rs. 150 per share. The company wants to raise additional funds of Rs. 1,20,000 and offers to the existing shareholders the right to apply for a new share at Rs. 120 for every five share held. What would be the value of right?

Right offering:

1. A rights offering is when a company issues to its existing shareholders a right to buy additional shares in the company.
2. The company offers its shareholder a specific number of shares at a special price.
3. The company will also set a time limit for the shareholder to buy these shares.
4. The shares are often offered at a discounted price to the existing shareholders.
5. In a rights offering, the subscription price at which each share may be offered is generally at a discount to the current market price.
6. Rights are often transferable, allowing the holder to sell them in the open market.

Number Of Right Shares: 1

Total Shares= Existing + New share = 5+1= 6

Value Of Right = (Number Of Right Shares / Total Shares) x (Market Value - Issue Price)

Value Of Right = (1/6) x (150-120)

∴ Value Of Right = 0.166667 x 30

∴ Value Of Right = Rs. 5

Alternatively,

Market Value Of 5 Existing Holdings = Rs. 150 x 5 = Rs. 750

Add: Issue Price Of 1 New Holding   = Rs. 120 x 1 = Rs. 120

∴ Value Of Total Holdings = 750 + 120 = Rs. 870

Value Of Each Share = 870/6 = Rs. 145

Value Of Right = Market Price - Average Price

Value Of Right = 150 - 145

∴Value Of Right = Rs. 5

Thus, option 1 is the correct answer.