Question

Cheer, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and no debt. The stock sells for $30 per share, but the book value per share is $45. Net income for Teardrop is currently $3.3 million. The new facility will cost $30 million and will increase net income by $600,000. 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.)

a-2. Calculate the new total earnings. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

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.)

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.)

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.)

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 and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

As per HOMEWORKLIB POLICY we need to answer only maximum 4 subparts so please ask others as seperate one

D E F G H K17 А в 1 Solution :-(a) 2 3 New Facility Cost $45,000,000 4 Current Market price $30 5 6 Shares need to issued 1,500,000.00 7 8 Now total Shares 5000000 + 1500000 9 Total Value After Issue (5000000*$45) + (1500000*30) 10 11 (A) New Book Value New Value / New Shares 12 13 (B) Old Income + New Income 6500000 270000000 270000000 / 6500000 41.54 Per Sharel $3300000 + $600000 $3,900,000 15 (C) New EPS Total Income / Total Shares $3900000 / 6500000 $0.60 Per Share (D) $3300000 / 5000000 Old EPS Old Income / Old shares MPS (Old) Price Earning Ratio New EPS 0.66 Per Shares $30 45.455 Times $0.60 Per Share MPS / EPS As Given PE ratio is Constant MPS PE Ratio * EPS 45.455 * 0.60 27.27 Per Sharel