Question

Question 2

Google Books Incorporated has a market value equal to its book value. Currently, the firm has excess cash of $150,000 other assets of $ 345,000 and equity valued at $ 415,000. The firm has 5,000 shares of stock outstanding and net income of $85,000. What will the new earnings per share be if the firm uses 45 percent of its excess cash to complete a stock repurchase? (Show all workings)                                                                                                                   

Answer 1

Equity Valued = $415,000

Number of shares outstanding = 5,000

Share price

= Equity Valued / Number of shares outstanding

= $415,000 / 5,000

= $83

Excess Cash = $150,000

Excess Cash used for Stock Repurchase

= 45% of Excess Cash

= 45% of $150,000

= $67,500

Number of shares that can be repurchased

= Excess cash used for repurchase / Share Price

= $67,500 / $83

= 813.253

Number of shares outstanding after share repurchase

= Shares Outstanding before repurchase - Shares repurchased

= 5,000 - 813.253

= 4,186.747

Net Income = $85,000

Number of shares outstanding after share repurchase = 4,186.747

New Earnings per share

= Net Income / Number of shares outstanding after share repurchase

= $85,000 / 4,186.747

= $20.30

New Earnings per share after share repurchase = $20.30