Question

Cheer, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and...

Cheer, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for $34 per share, but the book value per share is $42. Net income for Teardrop is currently $4.7 million. The new facility will cost $50 million and will increase net income by $800,000. 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.)

Homework Answers

Answer #1

Solution :-  (A)

(1) :- Book value per share = Total Assets / Total Number of Shares

Total Assets = ( $42 * 8,000,000 ) + $50,000,000 = $386,000,000

Total No. of Shares = ( $50,000,000 / 34 ) + 800,000 = 9,470,588.24

Book Value per share = $386,000,000 / 9,470,588.24

= $40.76

(2)

New Total Earnings = Current Net Income + Additional Income

= $4,700,000 + 800,000

= $5,500,000

(3)

New EPS = New Earnings / New total number of shares

= $5,500,000 / 9,470,588.24

= $0.581

(4)

New Price of Stock =

Old EPS = 4,700,000 / 8,000,000 = 0.5875

New Price = P/E Ratio * New EPS

= ( 34 / 0.5875 ) * 0.5807

= $33.61

(5) New Market to Book Ratio

= Market price / Book Value

= $33.61 / $40.76

= 0.825 times

(b)

Net Income = EPS old * Total New number of shares

= $0.5875 * 9,470,588

= $5,563,970.45

If there is any doubt please ask in comments

Thank you please rate

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Eaton, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and...
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. (Do not round intermediate calculations and round your answer to 2 decimal places,...
Wayne, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and...
Wayne, 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 $800,000. Assume a constant price-earnings ratio. a-1. Calculate the net book value per share. (Do not round intermediate calculations and round your answer to 2 decimal places...
Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $23 million in...
Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $23 million in perpetuity. The current required return on the firm’s equity is 16 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.5 million shares of common stock outstanding and is subject to a corporate tax rate of 35 percent. The firm is planning a recapitalization under which it will issue $32 million of perpetual...
Ames, Inc., has a current stock price of $44.50. For the past year, the company had...
Ames, Inc., has a current stock price of $44.50. For the past year, the company had net income of $6,400,000, total equity of $21,610,000, sales of $39,300,000, and 4.4 million shares of stock outstanding. What are earnings per share (EPS)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Earnings per share [] $ What is the price?earnings ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)...
Ames, Inc., has a current stock price of $43.00. For the past year, the company had...
Ames, Inc., has a current stock price of $43.00. For the past year, the company had net income of $6,550,000, total equity of $21,640,000, sales of $39,600,000, and 4.7 million shares of stock outstanding. What are earnings per share (EPS)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Earnings per share            $ What is the price?earnings ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price?earnings...
Masterson, Inc., has 4.9 million shares of common stock outstanding. The current share price is $92.00,...
Masterson, Inc., has 4.9 million shares of common stock outstanding. The current share price is $92.00, and the book value per share is $12.50. The company also has two bond issues outstanding. The first bond issue has a face value of $86 million, a coupon rate of 5.4 percent, and sells for 97 percent of par. The second issue has a face value of $58 million, a coupon rate of 5.8 percent, and sells for 105.3 percent of par. The...
Mojito Mint Company has a debt–equity ratio of .25. The required return on the company’s unlevered...
Mojito Mint Company has a debt–equity ratio of .25. The required return on the company’s unlevered equity is 12 percent, and the pretax cost of the firm’s debt is 8.6 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $19,100,000. Variable costs amount to 75 percent of sales. The tax rate is 40 percent, and the company distributes all its earnings as dividends at the end of each year.    a. If...
Louisiana Timber Company currently has 4 million shares of stock outstanding and will report earnings of...
Louisiana Timber Company currently has 4 million shares of stock outstanding and will report earnings of $6.03 million in the current year. The company is considering the issuance of 2 million additional shares that will net $36 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.)    b-1. Assume the Louisiana Timber Company can earn 12.80 percent on the...
Bonaime, Inc., has 6.9 million shares of common stock outstanding. The current share price is $61.90,...
Bonaime, Inc., has 6.9 million shares of common stock outstanding. The current share price is $61.90, and the book value per share is $4.90. The company also has two bond issues outstanding. The first bond issue has a face value of $70.9 million, a coupon rate of 7.4 percent, and sells for 93.5 percent of par. The second issue has a face value of $35.9 million, a coupon rate of 7.4 percent, and sells for 92.5 percent of par. The...
Bonaime, Inc., has 6.7 million shares of common stock outstanding. The current share price is $61.70,...
Bonaime, Inc., has 6.7 million shares of common stock outstanding. The current share price is $61.70, and the book value per share is $4.70. The company also has two bond issues outstanding. The first bond issue has a face value of $70.7 million, a coupon rate of 7.2 percent, and sells for 94.5 percent of par. The second issue has a face value of $35.7 million, a coupon rate of 7.2 percent, and sells for 93.5 percent of par. The...