Question

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).

Answer 1

Answer a:

Total shares of Cemtrex, before SEO = 8.5 million

Cemtrex’s shares on the day of the SEO = $1.30

Market capitalization (price × shares) of Cemtrex prior to the SEO = $1.30 * 8.5 = $11.05 million

Market capitalization (price × shares) of Cemtrex prior to the SEO = $11.05 million or $11,500,000

Answer b:

Market capitalization of Cemtrex after the SEO = $1.30 * 8,500,000 + 1.06 * 8,500,000/3 = $14,053,333.33

Answer c:

New stock price for Cemtrex after the SEO = $14,053,333.33 / (8,500,000 + 8,500,000 /3) = $1.24

New stock price for Cemtrex after the SEO = $1.24