Question

The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets....

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

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Answer #1

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

(if any query please post in the comments, I will reply in the comments)

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