Question

X Ltd. had $5,000$ $12\%$ Redeemable Preference Shares of Rs. $100$ each. The company decided to redeem them by issuing equity shares of Rs. $100$ each $@$ a premium of $25\%$. The member of equity shares to be issued are ________.

• A. $4000$ shares
• B. $5000$ shares
• C. $4480$ shares
• D. $5600$ shares

Answer 1

The correct option is B $5000$ shares

Preference shares are redeemd using equity shares. The company issues new equity shares usually at premium so that there are enough resources for redemption procedure.
The first step is to find out the amount to be redeemed:

Amount to be redeemed= $Numberofshares\times Facevalueofshare$

Substitute values in the above equation

Amount to be redeemed=$15000shares\times Rs10=Rs1,50,000$

Thus, the company has to redeem Rs1,50,000 amount preference share

Now, the amount of equity to be issued has to be calculated to redeem preference share and it is calculated as follows:

Market value of share = Face value + Premium

= Rs100+Rs25 =Rs125

Equity to be issued=$\frac{RedeemAmount}{Marketvalueofshare}$

Equity to be issued =$\frac{Rs1,50,000}{Rs125}=4,000Shares$

Hence. the company has to issue 4,000shares at Rs125 to redeem the preference share.