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Question

X Ltd. decides to redeem 650, 15% Pref. Shares of Rs. 100 each at 10% premium. It has a General Reserve of Rs. 45,500 and a Securities Premium of Rs. 1,000. If the new equity shares are to be issued at 30% premium, the minimum number of equity shares of Rs 10 each to be issued for the purpose of redemption is ________.

A
1950
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B
2000
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C
3124
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D
2500
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Solution

The correct option is A 1950
Preference shares are the only one which can be redeemed or returned back to the shareholder. The company prefers to issue new equity shares to fund the redemption process.
The first step is to find out the preference shares to be redeemed and it can be calculated as follows:
Amount to be redeemed= Numberofshare×Marketvalueof share
Substitute the given information in the above equation
Amount to be redeemed= 650shares×Rs110=Rs71,500

Balance in reserve & surplus with the company= General Reserve+Security premium reserve =Rs45,500+Rs1000 =Rs46,500
Net amount to issue new equtiy= Rs71,500-Rs46,500 =R25,000

Thus, the company needs to issue new equity to redeem Rs71,500 preference shares. And this can be calculated as under:
Equity to be issued=AmounttoredeemMarketvalueofshare
Market value of share= Face value+Premium =Rs10+Rs3 =Rs13
Substitute the given values in the above equation
Equity to be issued=Rs25,000Rs13=1,950shares
Thus, the company need to issue 1,950shares at Rs13 to redeem the preference shares.


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