Question

X ltd provides the following information:

12% Preference Shares of Rs 10 each	6,00,000
General reserve	3,00,000
Profit and loss account	5,00,000
Securities Premium	70,000
Investments	4,50,000
Cash	1,00,000

The 12% preference shares are redeemable at a premium of 10%. The company wishes to maintain the cash balance at Rs 50,000. For the purpose of redemption of preference shares, It proposed to sell the investment for Rs 4,00,000. The company proposes to issue a sufficient number of equity shares of Rs 100 each at a premium of 5% to raise required cash resources. The premium on issue of fresh equity shares is __________.

• A. Rs. 5,000
• B. Rs. 10,000
• C. Rs.15,000
• D. Rs. 20,000

Answer 1

The correct option is B Rs. 10,000

Preference shares are to redeemed using some of the company's assets and issuing new equity to pay for the amount pending to preference shareholders.

$Preferencesharetoberedeemed=Facevalueofshare+Premium$

Substitute values in the above equation

$Preferencesharetoberedeemed=Rs6,00,000+Rs60,000=Rs6,60,000$

Now, the equity shares to be issued for redemption of preference shares can be calculated using the information provided in the following way:

$Equitysharestobeissue=RedeemableValue-Cashused-Salevalue$

Substitute values in the above equation

$Equitysharestobeissue=Rs6,60,000-Rs50,000-Rs4,00,000=Rs2,10,000$

Shares are issued at premium so that security must be there for the amount due from insolvent members. It is calculated by finding the premium perecentage on face value of equity shares.

$Premiumonissuedshares=Rs2,10,000\times \frac{5}{100}=Rs10,500$

Hence, X Ltd has issued shares for a premium of $Rs10,500$.