A company with 500,000 ordinary shares of £1 nominal makes a 1 for 5 rights issue at £1.50 per share, and all rights are taken up. What is the increase in share premium?
Answer and explanation
Correct answer: A. £50,000
- Step 1: New shares = 500,000 / 5 = 100,000.
- Step 2: Issue price £1.50 less nominal £1.00 = £0.50 premium per share.
- Step 3: Share premium = 100,000 × £0.50 = £50,000.
Answer
£50,000.
Why not the others: £150,000 is the total cash raised, which includes the nominal value. £100,000 is the increase in share capital, not the premium. £25,000 uses a premium of 25p a share, which is not the difference between the issue price and nominal value.
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