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To finance the expansion, SSML is considering a right issue. However, the management of SSML wants to
maintain its existing debt equity ratio, return on total assets ratio and dividend payout percentage. Moreover,
they wish to keep the ex-right price to be the same as current market price. SSML follows a policy of retaining
30% of its profits. The current market price of its shares is Rs. 20 whereas its share price beta is 1.23. Presently,
market return is 16% whereas yield on one year treasury bills is 12%. Market is assumed to be strong form
efficient.
Required: Under the circumstances referred to in the above situation, what should be:
(a) The right ratio
(b) The right offer price
(c) Theoretical ex-right price
(d) Value of each right (17)
Past papers
Qs. no in paper
5
1
5
1
Attempt
W 09
S 10
S 10
W 11
Topic
Right issues
Dividend policy calculations
Right issues
Dividend irrelevance
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Level of difficulty
Average
Average
Difficult
Average