Question

Eaton, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and no debt. The stock sells for $36 per share, but the book value per share is $8. Net income is currently $4 million. The new facility will cost $45 million, and it will increase net income by $780,000. Assume a constant price-earnings ratio. |

a-1 |
Calculate the new book value per share. |

Book value | $ |

a-2 |
Calculate the new total earnings. |

Total earnings | $ |

a-3 |
Calculate the new EPS. |

EPS | $ per share |

a-4 |
Calculate the new stock price. |

Stock price | $ |

a-5 |
Calculate the new market-to-book ratio. |

Market-to-book ratio |

b. |
What would the new net income for the company have to be for the
stock price to remain unchanged? |

Net income | $ |

Answer #1

Calculate the new book value per share.

Number of shares after offering =45000000/36+5000000=6250000

new book value per
share=((8*5000000)+45000000)/6250000**=$13.60 Per
share**

Calculate the new total earnings.

new total earnings=4000000+780000=**$4780000**

Calculate the new EPS

new total earnings/Number of shares after offering

=$4780000**/**6250000=**.7648**

Calculate the new stock price

PE ratio =Price/EPS

EPS=4000000/5000000=.80

PE ratio =36/.80=45

Stock price=45***.7648=$34.42**

Calculate the new market-to-book ratio

Market price per share/Book value per share

=34.52/13.60=**2.5306**

What would the new net income for the company have to be for the stock price to remain unchanged?

The new net income must be the new number of shares outstanding times the current EPS

=6250000/.7648**=8172071**

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