The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm?
Number of shares outstanding 50,000
Book value $500,000
Market value $720,000
Net income $45,000
Return on equity 0.09 Price-earnings ratio 16
Earnings per share $0.90
Current structure
Number of shares outstanding 50,000
Book value = $500,000
Market value = $720,000
Net income = $45,000
Return on equity = 0.09
Price-earnings ratio = 16
Earnings per share = $0.90
Market price per share = PE ratio * EPS = 16*0.9 = $14.4
After money raised for fixed assets
$315,000 will financed by issuing equity share
Number of Equity shares to be issued = 315,000 / 14.4 = 21,875
Net income generated = NPV of the project = $20,000
New Book value per share = Total equity share holder's fund / Total number of equity shares
= (500,000 + 315,000) / (50,000 + 21,875) = 815,000 / 71,875 = $11.34
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