Cemtrex Inc, a tech company involved in virtual reality, conducted a Seasoned Equity Offering (SEO) through...

Cemtrex Inc, a tech company involved in virtual reality, conducted a Seasoned Equity Offering (SEO) through rights offer on November 2018. The rights offer consisted in that for every 3 shares of Cemtrex an investor already owned, he or she could buy 1 more share at a discounted price of $1.06, the price of Cemtrex’s shares on the day of the SEO was $1.30. The SEO creates dilution — since it increases the number of shares, the value of each share decreases — but by doing it through a rights offer this dilution is potentially canceled. (a) Before the SEO, there were 8.5 million total shares of Cemtrex. Find the market capitalization (price × shares) of Cemtrex prior to the SEO. (b) Find the market capitalization of Cemtrex after the SEO, assume everyone participated to the full extend in the rights offer.1 (c) Find the new stock price for Cemtrex after the SEO (remember that market cap. = price × shares). 1Note: The market capitalization after the SEO is the old market cap. plus the funds raised through the SEO. Page 1 of 5 (d) Suppose that prior to the SEO you owned 300,000 shares of Cemtrex, so you are entitled to buy 100,000 shares at the discounted price. Compute the loss in value in the shares you owned prior to the SEO (these decreased in value from $1.30 to the new price), and show it exactly cancels out with the gain in value of the shares you bought in the rights offer for $1.06. (e) Show that your voting rights were not changes by the SEO; that is, you own the same percentage of shares outstanding before and after the SEO.

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Expert Solution


	A	Total Number of shares before SEO	8,500,000
	B=A/3	Number of rights	2,833,333
	C=B*1.06	Fund raised through SEO	$3,003,333
(a)	D=A*1.30	Market cap before SEO	$11,050,000
(b)	E=C+D	Market cap AFTER SEO	$14,053,333
	F=A+B	Number of shares After SEO	11,333,333
.(c)	G=E/F	New Stock Price after SEO	$1.24

	(d)	CALCULATION OF LOSS IN VALUE
	I	Number of share held before SEO	300,000
	J=I*1.30	Market value before SEO	$390,000
	K=I*1.24	Market value AFTER SEO	$372,000
	L=J-K	Loss in Value	$18,000

		CALCULATION OF GAIN IN VALUE
	M=I/3	Number of right shares bought	100,000
	N=M*1.24	Market Value of right shares	$124,000
	P=M*1.06	Amount paid for the right shares	$106,000
	Q=N-P	Gainin value in right shares	$18,000

	(e)	Percentage shares owned before SEO	3.5294%	(300000/8500000)
	R=I+M	Number of shares owned after SEO	400,000
	S=A+B	Total number of shares after SEO	11,333,333
	T=R/S	Percentage shares owned AFTER SEO	3.5294%
		NO CHANGE IN VOTING RIGHTS

jeff jeffy answered 1 year ago

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