Fundamentals of Corporate Finance 2077 Board Question Paper

Why Financial Managers Coordinate with Functional Managers

The financial manager must work closely with operational and functional managers because every strategic business decision has immediate financial consequences:

1. Marketing Decisions: Aggressive credit sales or new product promotions impact working capital, accounts receivable aging, and cash flow liquidity.
2. Production / Operations Decisions: Purchasing new manufacturing machinery or expanding factory capacity requires capital budgeting evaluation, cost-of-capital analysis, and optimal financing choices.
3. Human Resource Decisions: Wage increases, incentive schemes, and employee benefit programs alter operational fixed costs and require cash allocation.

Agency Problem Between Shareholders and Creditors

The agency conflict between stockholders and bondholders/creditors arises because:

• Asset Substitution / High-Risk Projects: Shareholders may pressure management to invest in speculative, high-risk projects. If the project succeeds, shareholders capture the upside gain; if it fails, creditors absorb the downside insolvency loss because their claims are capped at nominal interest.
• Additional Debt Issuance: Borrowing further debt with equal or senior priority dilutes existing creditors’ security collateral and drives down the market price of existing bonds.

How Stock Price Maximization Benefits Society

In a competitive, well-regulated market economy, maximizing stock price advances social welfare through:

1. Efficient Resource Allocation: Capital flows to firms that produce consumer-demanded goods and services most cost-effectively.
2. Innovation and Quality: To sustain competitive edge and profits, firms invest in research, superior technology, and product quality.
3. Employment and Value Creation: Value-creating companies generate sustainable employment, pay corporate taxes funding public infrastructure, and enhance pension fund savings.

Primary Market vs. Secondary Market

1. Primary Market: The market for brand-new security issues where issuing corporations and governments sell stocks or bonds directly to initial investors to raise fresh investment capital (e.g., IPOs, Rights Offerings).
2. Secondary Market: The market where previously issued securities are traded among investors without providing new funds to the original issuing entity (e.g., NEPSE daily trading). It provides liquidity and price discovery.

Major Types of Financial Institutions in Nepal

Under the regulatory purview of Nepal Rastra Bank (BAFIA 2073) and SEBON:

1. Class ‘A’ Commercial Banks (e.g., Nabil Bank, Global IME Bank)
2. Class ‘B’ Development Banks (e.g., Garima Bikas Bank, Muktinath Bikas Bank)
3. Class ‘C’ Finance Companies (e.g., Manjushree Finance, Goodwill Finance)
4. Class ‘D’ Microfinance Financial Institutions (MFIs)
5. Contractual Savings & Capital Market Intermediaries: Life/Non-Life Insurance companies, Mutual Funds, Merchant Bankers, Citizen Investment Trust (CIT), and Employees Provident Fund (EPF).

Meaning of Financial Derivatives

A financial derivative is a contractual financial instrument whose economic value is derived from and dependent upon an underlying asset, index, interest rate, or currency.

• Major Types: Forwards, Futures, Options, and Swaps.
• Primary Purposes: Risk hedging against adverse price movements and speculative arbitrage.

Calculation of 6-Month Forward Exchange Rate:

Given:

• Spot exchange rate ($S_0$) = $\text{USD } 1.15$ per Euro (direct quote for Euro in US)
• US nominal interest rate ($r_{\text{USD}}$) = $8\%$ p.a.
• European nominal interest rate ($r_{\text{€}}$) = $6\%$ p.a.
• Time period ($t$) = 6 months = $0.5$ year

Interest Rate Parity (IRP) Formula:

$$F = S_0 \times \frac{1 + r_{\text{USD}} \times t}{1 + r_{\text{€}} \times t}$$

$$F = 1.15 \times \frac{1 + (0.08 \times 0.5)}{1 + (0.06 \times 0.5)} = 1.15 \times \frac{1 + 0.04}{1 + 0.03} = 1.15 \times \frac{1.04}{1.03}$$

$$F = 1.15 \times 1.009709 = \mathbf{\text{USD } 1.1612 \text{ per Euro}}$$

Conclusion: The 6-month forward exchange rate is $1.1612 per Euro (Euro trades at a forward premium).

Calculation of Call Option Value:

Given:

• Strike / Exercise Price ($X$) = $\text{Rs. } 1,200$
• Current Market Price at Expiration ($S_T$) = $\text{Rs. } 1,500$
• Option Premium Paid = $\text{Rs. } 30$

Theoretical Value / Payoff of Call Option at Expiry:

$$\text{Value of Call} = \max(0, S_T - X) = \max(0, 1,500 - 1,200) = \mathbf{\text{Rs. } 300}$$

(Net Profit to Holder = Value - Premium = $\text{Rs. } 300 - \text{Rs. } 30 = \mathbf{\text{Rs. } 270}$).

Conclusion: The value of the call option at expiration is Rs. 300.

Calculation of Yearly Loan Installment:

Given:

• Loan Principal ($PV$) = $\text{Rs. } 125,000$
• Loan Term ($n$) = 3 years
• Annual Interest Rate ($i$) = $12\% = 0.12$

Formula:

$$PMT = \frac{PV}{PVIFA_{i, n}} = \frac{PV}{\frac{1 - (1 + i)^{-n}}{i}}$$

$$PVIFA_{12\%, 3} = \frac{1 - (1.12)^{-3}}{0.12} = \frac{1 - 0.711780}{0.12} = \frac{0.288220}{0.12} = 2.40183$$

$$PMT = \frac{125,000}{2.40183} = \mathbf{\text{Rs. } 52,043.65}$$

Conclusion: Hari must pay an annual installment of Rs. 52,043.65 at the end of each year.

Calculation of Effective Annual Rate (EAR):

Given:

• Loan Amount = $\text{Rs. } 100,000$
• Stated Interest Rate = $10\%$
• Interest Amount = $10\% \times 100,000 = \text{Rs. } 10,000$
• Compensating Balance Requirement = $10\% \times 100,000 = \text{Rs. } 10,000$
• Loan Basis: Discounted with Compensating Balance

Usable Funds:

$$\text{Usable Funds} = \text{Face Value} - \text{Discount Interest} - \text{Compensating Balance}$$

$$\text{Usable Funds} = 100,000 - 10,000 - 10,000 = \text{Rs. } 80,000$$

Effective Interest Rate (EIR):

$$EIR = \frac{\text{Interest Paid}}{\text{Usable Funds}} = \frac{10,000}{80,000} = 0.125 = \mathbf{12.5\%}$$

Conclusion: The effective interest rate for Dabur Nepal is 12.5%.

Preferred Stock as a Hybrid Form of Long-Term Financing

1. Why Preferred Stock is a Hybrid Security:

Preferred stock combines key economic characteristics of both common equity and long-term debt:

• Like Debt: It pays a fixed, pre-determined dividend rate; it has priority of claim over common equity on earnings and liquidation assets; and preferred shareholders generally do not possess voting rights.
• Like Common Equity: Failure to pay dividends does not trigger corporate bankruptcy; preferred stock has no fixed maturity date (perpetual unless recalled); and preferred dividends are paid out of after-tax net income (not tax-deductible).

2. Merits of Preferred Stock Financing:

• No Dilution of Control: Common shareholders maintain voting control since preferred stock is non-voting.
• No Fixed Legal Bankruptcy Threat: Omission of a dividend does not precipitate technical default or court insolvency.
• Preserves Collateral Capacity: Does not require pledging fixed assets as security, preserving debt capacity.

3. Demerits of Preferred Stock Financing:

• High After-Tax Cost: Unlike bond interest, preferred dividends cannot be deducted for corporate income tax calculation.
• Cumulative Dividend Burden: Unpaid cumulative dividends accumulate as senior arrears before any common dividends can be paid.
• Higher Expected Return than Debt: Investors demand a higher yield than bonds due to junior liquidation ranking.

Mergers and Acquisitions & Their Significance in Nepal

1. Concept of M&A:

• Merger: A corporate combination where two or more operating companies combine to form a single entity. Typically, one firm absorbs the other, or both dissolve into a newly incorporated enterprise.
• Acquisition / Takeover: The purchase of a controlling equity stake or major operational assets of a target company by an acquirer.

2. Significance of Mergers & Acquisitions in Nepal:

1. Regulatory Capital Adequacy Compliance: Catalyzed by Nepal Rastra Bank’s policy mandates that raised commercial bank minimum paid-up capital from Rs 2 Billion to Rs 8 Billion, resulting in major commercial bank consolidations (e.g., Global IME Bank, Nepal Investment Mega Bank).
2. Realization of Economies of Scale: Eliminates redundant duplicate branch networks in identical commercial centers, reduces IT infrastructure costs, and streamlines back-office administration.
3. Synergy and Enhanced Lending Capacity: Combined financial strength allows larger Single Borrower Limits to finance national mega hydropower, transmission, and infrastructure projects.
4. Distressed Asset Resolution: Stronger banks absorb troubled Class ‘B’ or ‘C’ institutions, protecting public depositors and restoring financial sector stability.

Step-by-Step Calculation of Treasury Yields:

Given:

• Real risk-free rate ($r^*$) = $2.0\%$ constant
• Inflation rates: Year 1 = $7\%$, Year 2 = $5\%$, Year 3 and thereafter = $3\%$
• Maturity Risk Premium ($MRP_t$): $MRP_1 = 0.2\%$, increases by $0.2\%$ per year up to $1.0\%$ maximum (Year 5+).

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a. Average Expected Inflation Rate ($IP_t$):

• 1-Year: $IP_1 = 7.0\% = \mathbf{7.00\%}$
• 2-Year: $IP_2 = \frac{7 + 5}{2} = \mathbf{6.00\%}$
• 3-Year: $IP_3 = \frac{7 + 5 + 3}{3} = \frac{15}{3} = \mathbf{5.00\%}$
• 4-Year: $IP_4 = \frac{7 + 5 + 3 + 3}{4} = \frac{18}{4} = \mathbf{4.50\%}$
• 5-Year: $IP_5 = \frac{7 + 5 + 3 + 3 + 3}{5} = \frac{21}{5} = \mathbf{4.20\%}$
• 10-Year: $IP_{10} = \frac{7 + 5 + 8 \times 3}{10} = \frac{36}{10} = \mathbf{3.60\%}$

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b. Maturity Risk Premium ($MRP_t$):

• 1-Year: $MRP_1 = \mathbf{0.20\%}$
• 2-Year: $MRP_2 = 0.2 + 0.2 = \mathbf{0.40\%}$
• 3-Year: $MRP_3 = 0.4 + 0.2 = \mathbf{0.60\%}$
• 4-Year: $MRP_4 = 0.6 + 0.2 = \mathbf{0.80\%}$
• 5-Year: $MRP_5 = \mathbf{1.00\%}$
• 10-Year: $MRP_{10} = \mathbf{1.00\%}$ (capped at 1.0%)

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c. Nominal Treasury Interest Rates ($r_t = r^* + IP_t + MRP_t$):

• 1-Year: $r_1 = 2.0\% + 7.00\% + 0.20\% = \mathbf{9.20\%}$
• 2-Year: $r_2 = 2.0\% + 6.00\% + 0.40\% = \mathbf{8.40\%}$
• 3-Year: $r_3 = 2.0\% + 5.00\% + 0.60\% = \mathbf{7.60\%}$
• 4-Year: $r_4 = 2.0\% + 4.50\% + 0.80\% = \mathbf{7.30\%}$
• 5-Year: $r_5 = 2.0\% + 4.20\% + 1.00\% = \mathbf{7.20\%}$
• 10-Year: $r_{10} = 2.0\% + 3.60\% + 1.00\% = \mathbf{6.60\%}$

Step-by-Step EBIT-EPS Analysis:

Given:

• Existing Debt = $\text{Rs. } 3,000,000$ at $12\%$ interest $\implies I_0 = \text{Rs. } 360,000$
• New Capital Needed = $\text{Rs. } 4,000,000$
• Existing Common Shares ($S_0$) = $800,000$
• Tax Rate ($t$) = $40\% = 0.40$
• Operating Profit ($EBIT$) = $\text{Rs. } 1,500,000$

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Financing Alternatives:

1. Option 1 (Additional Debt at 14%):

   • New Interest = $14\% \times 4,000,000 = \text{Rs. } 560,000$
   • Total Interest ($I$) = $360,000 + 560,000 = \text{Rs. } 920,000$
   • Total Shares ($S$) = $800,000$
   • Preferred Dividend ($PD$) = $0$$EPS_1 = \frac{(EBIT - I)(1 - t) - PD}{S} = \frac{(1,500,000 - 920,000)(0.60)}{800,000} = \frac{348,000}{800,000} = \mathbf{\text{Rs. } 0.435}$$

2. Option 2 (Preferred Stock at 12%):

   • Total Interest ($I$) = $\text{Rs. } 360,000$
   • Preferred Dividend ($PD$) = $12\% \times 4,000,000 = \text{Rs. } 480,000$
   • Total Shares ($S$) = $800,000$$EPS_2 = \frac{(1,500,000 - 360,000)(0.60) - 480,000}{800,000} = \frac{684,000 - 480,000}{800,000} = \frac{204,000}{800,000} = \mathbf{\text{Rs. } 0.255}$$

3. Option 3 (Common Stock at Rs 100/share):

   • New Shares Issued = $\frac{4,000,000}{100} = 40,000$ shares
   • Total Shares ($S$) = $800,000 + 40,000 = 840,000$ shares
   • Total Interest ($I$) = $\text{Rs. } 360,000$, $PD = 0$$EPS_3 = \frac{(1,500,000 - 360,000)(0.60)}{840,000} = \frac{684,000}{840,000} = \mathbf{\text{Rs. } 0.814}$$

Conclusion for (a): At $EBIT = \text{Rs. } 1,500,000$, Common Stock (Option 3) produces the highest EPS (Rs. 0.814).

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b. Indifference Point Between Debt Plan (Option 1) and Common Stock (Option 3):

$$\frac{(EBIT^* - 920,000)(0.60)}{800,000} = \frac{(EBIT^* - 360,000)(0.60)}{840,000}$$

$$\frac{EBIT^* - 920,000}{80} = \frac{EBIT^* - 360,000}{84}$$

$$84(EBIT^* - 920,000) = 80(EBIT^* - 360,000)$$

$$84 EBIT^* - 77,280,000 = 80 EBIT^* - 28,800,000$$

$$4 EBIT^* = 48,480,000 \implies EBIT^* = \mathbf{\text{Rs. } 12,120,000}$$

Conclusion: The break-even EBIT indifference point between debt and equity is Rs. 12,120,000.

Financial Forecasting for Ramailo Tours Company:

Given (2016):

• Sales ($S_0$) = $\text{Rs. } 845,000$
• Projected Growth ($g$) = $20\% = 0.20$
• Projected Sales 2017 ($S_1$) = $845,000 \times 1.20 = \text{Rs. } 1,014,000$
• Spontaneous Assets = Current Assets = $\text{Rs. } 139,000$
• Fixed Assets are at full capacity $\implies$ Plant & Equip increases spontaneously ($375,000 \times 1.20$)
• Spontaneous Liabilities = Accounts Payable = $\text{Rs. } 62,000$
• Net Income 2016 = $\text{Rs. } 102,700$, Dividends = $\text{Rs. } 30,810$
• Retention Ratio ($b$) = $1 - \frac{30,810}{102,700} = 1 - 0.30 = 0.70$ (Dividend Payout = 30%)

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Pro Forma Income Statement (2017):

• Sales = $\text{Rs. } 1,014,000$
• Costs ($657,000 \times 1.20$) = $(788,400)$
• Other expenses ($17,500 \times 1.20$) = $(21,000)$
• EBIT = $\text{Rs. } 204,600$
• Interest Expense (constant) = $(12,500)$
• Taxable Income = $\text{Rs. } 192,100$
• Taxes ($35\%$) = $(67,235)$
• Net Income = $\mathbf{\text{Rs. } 124,865}$
• Dividends ($30\%$) = $\text{Rs. } 37,459.50$
• Addition to Retained Earnings = $\mathbf{\text{Rs. } 87,405.50}$

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a. Additional Funds Needed (AFN):

• Required Increase in Total Assets = $20\% \times 514,000 = \text{Rs. } 102,800$
• Spontaneous Increase in A/P = $20\% \times 62,000 = \text{Rs. } 12,400$
• Addition to Retained Earnings = $\text{Rs. } 87,405.50$$AFN = \Delta \text{Assets} - \Delta \text{Spont Liab} - \Delta RE = 102,800 - 12,400 - 87,405.50 = \mathbf{\text{Rs. } 2,994.50}$$

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b. Pro Forma Balance Sheet (2017):

• Assets: Current Assets $\text{Rs. } 166,800$, Net Plant & Equip $\text{Rs. } 450,000 \implies$ Total Assets = Rs. 616,800
• Liabilities & Equity: Accounts Payable $\text{Rs. } 74,400$, Notes Payable $\text{Rs. } 15,000$, Long-term Debt $\text{Rs. } 144,000$, Common Stock $\text{Rs. } 100,000$, Retained Earnings ($193,000 + 87,405.50 = \text{Rs. } 280,405.50$), AFN (plug) = Rs. 2,994.50 $\implies$ Total Liabilities & Equity = Rs. 616,800.

Cross-Rate and Foreign Exchange Calculations:

a. Given:

• Japanese Yen: $\yen 118 = \text{USD}1$
• British Pound: $\pounds 1 = \text{USD}1.81$

i. Cross-rate in Yen per Pound:

$$\text{Cross Rate} = \frac{\yen}{\text{USD}} \times \frac{\text{USD}}{\pounds} = 118 \times 1.81 = \mathbf{\yen 213.58 \text{ per } \pounds 1}$$

ii. Arbitrage Opportunity Analysis:

• Quoted Market Cross-Rate: $\yen 204 = \pounds 1$
• Theoretical Equilibrium Cross-Rate: $\yen 213.58 = \pounds 1$
• Yes, triangular arbitrage exists! The Pound is undervalued in the direct Yen market (yielding only $\yen 204$ instead of $\yen 213.58$).
• Arbitrage Strategy:
  1. Start with $\yen 204,000$ and convert to $\pounds 1,000$ at the quoted cross-rate.
  2. Convert $\pounds 1,000$ to US Dollars at $\pounds 1 = \text{USD}1.81 \implies \text{USD}1,810$.
  3. Convert $\text{USD}1,810$ to Japanese Yen at $\text{USD}1 = \yen 118 \implies \text{USD}1,810 \times 118 = \yen 213,580$.
  4. Risk-free Arbitrage Profit: $\yen 213,580 - \yen 204,000 = \mathbf{\yen 9,580}$.

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b. Given:

• Spot Rate: $\text{CAD} 1.15 / \text{USD}1$
• Six-Month Forward Rate: $\text{CAD} 1.19 / \text{USD}1$

i. Premium or Discount:

The US Dollar buys more Canadian Dollars forward ($1.19$) than spot ($1.15$). Therefore, the US Dollar is selling at a forward premium relative to the Canadian Dollar.

ii. Expected Currency Movement:

The Canadian Dollar is expected to depreciate, while the US Dollar is expected to appreciate in value.

Corporate Risk Management & Hedging with Futures and Swaps

1. Rationale for Employing Risk Management:

Corporate finance theory emphasizes that proactive risk management enhances shareholder value:

• Avoiding Costs of Financial Distress: Buffers cash flows against severe swings that could cause insolvency or credit rating downgrades.
• Ensuring Capital for Positive NPV Investments: Prevents underinvestment by ensuring internal cash flow is available for planned CapEx regardless of external market shocks.
• Tax Asymmetry Benefits: Progressive tax regimes impose higher penalties on volatile earnings than stable earnings.
• Reducing Agency Costs: Protects managerial performance appraisal from uncontrollable macroeconomic volatility (interest rates, commodity prices, foreign exchange).

2. Hedging with Futures Contracts:

A futures contract is a standardized, exchange-traded agreement to buy or sell an asset at a predetermined price on a future date.

• Example: An airline needing 1 million gallons of jet fuel in 6 months takes a long futures position in crude oil at $\text{USD}75$/barrel. If geopolitical conflict drives oil to $\text{USD}95$/barrel, the gain on the futures contract offsets the increased physical purchase price.

3. Hedging with Swaps:

A swap is an OTC agreement between two counterparties to exchange streams of cash flows over a specified timeline.

• Interest Rate Swap Example: A manufacturing company with a $\text{Rs. } 100 \text{ million}$ floating-rate bank loan (pegged to 3-month Treasury bills) fears rising interest rates. It enters an interest rate swap where it agrees to pay a fixed $10\%$ rate to a financial counterparty while receiving the floating rate. This synthetically converts its floating loan into a predictable fixed-rate obligation.

Evaluation of Working Capital Financing Alternatives:

Given:

• Needed Working Capital = $\text{Rs. } 4,400,000$ (Assume 365-day year)

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Alternative 1: Forgoing Cash Discount (“3/10, net 30”):

$$APR = \frac{\text{Discount } \%}{100 - \text{Discount } \%} \times \frac{365}{\text{Credit Period} - \text{Discount Period}}$$

$$APR = \frac{3}{97} \times \frac{365}{30 - 10} = 0.030928 \times \frac{365}{20} = 0.030928 \times 18.25 = \mathbf{56.44\%}$$

$$EAR = \left(1 + \frac{0.03}{0.97}\right)^{365/20} - 1 = (1.030928)^{18.25} - 1 = \mathbf{74.35\%}$$

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Alternative 2: Bank Loan with 12% Compensating Balance:

• Stated Loan Amount = $\text{Rs. } 5,000,000$ at $15\%$ interest
• Compensating Balance = $12\% \times 5,000,000 = \text{Rs. } 600,000$
• Usable Funds = $5,000,000 - 600,000 = \text{Rs. } 4,400,000$ (Matches needed funds!)
• Annual Interest Cost = $15\% \times 5,000,000 = \text{Rs. } 750,000$$EIR = \frac{\text{Interest Cost}}{\text{Usable Funds}} = \frac{750,000}{4,400,000} = 0.17045 = \mathbf{17.05\%}$$

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Alternative 3: Six-Month Commercial Paper:

• Face Value = $\text{Rs. } 4,700,000$, Net Proceeds = $\text{Rs. } 4,400,000$
• Discount / Interest per 6 months = $4,700,000 - 4,400,000 = \text{Rs. } 300,000$
• 6-Month Rate = $\frac{300,000}{4,400,000} = 0.068182$ ($6.818\%$)
  $$EAR = (1 + 0.068182)^2 - 1 = (1.068182)^2 - 1 = \mathbf{14.10\%}$$
  (Nominal APR $= 6.8182\% \times 2 = \mathbf{13.64\%}$).

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a. Recommendation:

Select Commercial Paper (Alternative 3) because it has the lowest annual cost (14.10% vs. 17.05% for bank loan and 56.44% for forgoing trade discount).

b. Bank Flexibility Preference:

• Cost differential = $17.05\% - 14.10\% = 2.95\%$.
• Since $2.95\% > 2.0\%$, the additional cost exceeds the firm’s $2\%$ flexibility premium tolerance. Thus, commercial paper remains preferred.

c. Lowest Expected Cost Criterion:

The source with lowest numerical cost is not necessarily selected because:

1. Refinancing / Rollover Risk: Commercial paper markets can abruptly freeze during liquidity crises.
2. Bank Relationships: Maintaining bank credit lines ensures reliable lender support during unforeseen distress.

Comprehensive Rights Offering Analysis for Roal Shoe Co.:

Given:

• Current Shares Outstanding ($N_0$) = $350,000$
• Current Market Price ($P_0$) = $\text{Rs. } 760$
• New Shares Offered ($N$) = $70,000$
• Subscription Price ($S$) = $\text{Rs. } 700$

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a. Advantages of Rights Offering:

1. Preserves Existing Ownership & Control: Protects current shareholders from voting dilution.
2. Lower Flotation Costs: Cheaper than public underwriting because securities are offered directly to existing owners.
3. High Probability of Success: Discounted subscription price ensures strong shareholder participation.

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b. Number of Rights Required to Purchase One New Share ($N_r$):

$$N_r = \frac{\text{Existing Shares}}{\text{New Shares}} = \frac{350,000}{70,000} = \mathbf{5 \text{ rights}}$$

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c. Theoretical Value of a Right ($R$):

$$R = \frac{P_0 - S}{N_r + 1} = \frac{760 - 700}{5 + 1} = \frac{60}{6} = \mathbf{\text{Rs. } 10}$$

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d. Ex-Rights Price of Stock ($P_e$):

$$P_e = P_0 - R = 760 - 10 = \mathbf{\text{Rs. } 750}$$

(Alternatively: $P_e = \frac{N_0 P_0 + N S}{N_0 + N} = \frac{(350,000 \times 760) + (70,000 \times 700)}{420,000} = \frac{266,000,000 + 49,000,000}{420,000} = \mathbf{\text{Rs. } 750}$).

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e. Shareholder Wealth Position:

Initial Wealth Position:

• 500 shares $\times \text{Rs. } 760 = \text{Rs. } 380,000$
• Cash = $\text{Rs. } 50,000$
• Total Initial Wealth = Rs. 430,000

Transaction Details:

• Total Rights Received = $500 \text{ rights}$
• Sell 200 Rights: Proceeds $= 200 \times \text{Rs. } 10 = \text{Rs. } 2,000$
• Exercise 300 Rights: New Shares Purchased $= \frac{300}{5} = 60 \text{ shares}$.
  • Subscription Cost $= 60 \text{ shares} \times \text{Rs. } 700 = \text{Rs. } 42,000$.

Wealth After Offering:

• Total Shares Owned $= 500 + 60 = 560 \text{ shares}$.
• Stock Value $= 560 \times \text{Rs. } 750 = \mathbf{\text{Rs. } 420,000}$.
• Cash Remaining $= 50,000 + 2,000 - 42,000 = \mathbf{\text{Rs. } 10,000}$.
• Total Ending Wealth: $\text{Rs. } 420,000 + \text{Rs. } 10,000 = \mathbf{\text{Rs. } 430,000}$.

Conclusion: The shareholder’s total wealth remains completely unchanged at Rs. 430,000.