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.

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