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Question

X ltd provides the following information:

12% Preference Shares of Rs 10 each 6,00,000
General reserve3,00,000
Profit and loss account5,00,000
Securities Premium 70,000
Investments4,50,000
Cash1,00,000
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
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B
Rs. 10,000
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C
Rs.15,000
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D
Rs. 20,000
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Solution

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=RedeemableValueCashusedSalevalue

Substitute values in the above equation

Equitysharestobeissue=Rs6,60,000Rs50,000Rs4,00,000=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=Rs2,10,000×5100=Rs10,500

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


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