Question

# Walker Machine Tools has 6.7 million shares of common stock outstanding. The current market price of...

Walker Machine Tools has 6.7 million shares of common stock outstanding. The current market price of Walker common stock is \$76 per share rights-on. The company’s net income this year is \$23.50 million. A rights offering has been announced in which 670,000 new shares will be sold at \$70.50 per share. The subscription price plus nine rights is needed to buy one of the new shares.

a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering? (Do not round intermediate calculations and round your answers to 2 decimal places.)

 Earnings per share Price-earnings ratio

b. What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering? (Assume there is no change in the market value of the stock, except for the change when the stock begins trading ex-rights.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

 Earnings per share Price-earnings ratio

 a. Earnings per share = Net Income/Number of shares Earnings per share = 23.50/6.7 Earnings per share 3.51 The earnings per share is \$3.51 Price earnings ratio = Stock Price/Earnings per share Price earnings ratio = 76/3.51 Price earnings ratio 21.67 The price earnings ratio is 21.67 times b. Earnings per share = 23.50/(6.70+0.67) Earnings per share = 23.50/7.37 Earnings per share \$3.19 Rights value = (76-70.50)/(9+1) Rights value \$0.55 Ex-rights price = Rights on price - Rights value Ex-rights price = 76 - 0.55 Ex rights price \$75.45 Price earnings ratio = 75.45/3.19 Price earnings ratio 23.66 The price earnings ratio is 23.66 times

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