Question

A firm has a market value equal to its book value. Currently, the firm has excess cash of $500 and other assets of $7,000. Equity is worth $7,500. The firm has 750 shares of stock outstanding and net income of $810. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

		a) $.63
		b) $.71
		c) $1.08
		d) $1.16
		e) $1.79

Answer 1

The new EPS is computed as shown below:

= Net income / Number of shares outstanding

Number of shares outstanding is computed as follows:

= Current number of shares - Excess cash / Value per share

Value per share is computed as follows:

= Equity / Number of shares outstanding

= $ 7,500 / 750

= $ 10

So, the number of shares outstanding will be computed as follows:

= 750 - $ 500 / $ 10

= 700

So, the EPS will be computed as follows:

= $ 810 / 700

= $ 1.16 Approximately

So, the correct answer is option c.

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