Question

Teardrop, Inc., wishes to expand its facilities. The company currently has 12 million shares outstanding and no debt. The stock sells for $30 per share, but the book value per share is $42. Net income for Teardrop is currently $4.3 million. The new facility will cost $45 million, and it will increase net income by $500,000. The par value of the stock is $1 per share. Assume a constant price-earnings ratio. a-1. Calculate the new book value per share. Assume the stock price is constant. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Book value per share a-2. Calculate the new total earnings. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round Intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Total earnings a-3. Calculate the new EPS. Include the incremental net income in your calculations. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) EPS per share a-4. Calculate the new stock price. Include the incremental net income in your calculations. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price a-5. Calculate the new market-to-book ratio. (Do not round Intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) Market-to-book ratio b. What would the new net income for the company have to be for the stock price to remain unchanged? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars 1.0. 1,234,567. Do not round Intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Net income

Answer 1

Given,

Current number of shares = 12 million

Price per share = $ 30

Book value per share = $ 42

Net income currently = $ 4.3 million or $ 4300000

Cost of new facility = $ 45 million

Solution :-

Number of shares - Current number + - of Shares after offering cost of neu Cost of new facility Price per share 12 million shares , & us million $30 per share = 12 million shares t les million Shares = 13.5 million shares Since the par value per Share els $1, the cold book value of Shares is the current number of shares outstanding,

رحمان New book value per share - Curent no. x book Value + Increased noo & Price per of shares per Share of shares Share] Number of shares after offering (12 million x $42) + (1.5 million X $30) 13.5 million &504 million + $us million 13.5 million & sua million 3.5 million – $40.67 Thus, New book value per share is $40.67

New total earnings - Net Income + Incremental net income Currently E & 4300000 + $500000 > $4800000 New EPS New Total earnings Number of shares after offering $4800000 Shares pee $0.3556 Current EPS - Net Income Currently Current no. of shares 8 million 12 million Shares tec = $0.35833333

Current PE ratio - Current Price per share Current EPS $30 per shave $0.35833333 - 83.2093 Now, New Share Price - Current P/E & ratio New Total Earnings No. of shares after offering 83.72093 x $4800000 $13500000 - 83.72093 x 0.3SSSSSSSSS = $29.77

New - New mee per Share market to book ratio New Price per Share New book Value Per Share $22. 77 – 0.732 &o. 67 - Tb New Net Income Number of shares & Net Income currently atter offering Current no. of shares 0 13500000 shares & $4.3 million 12 million shares - 13500000 shares x 0.35833333 $4837500