Question

Wayne, Inc., wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $30 per share, but the book value per share is $8. Net income is currently $3 million. The new facility will cost $60 million, and it will increase net income by $840,000. 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, e.g., 32.16.) a-2. Calculate the new EPS. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) a-3. Calculate the new stock price. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a-4. Calculate the new market-to-book ratio. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) 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 answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

a-1.New book value per share

a-2.New EPS

a-3.New stock price

a-4.New market-to-book ratio

b.Net income

Answer 1

a1.

Change in Book Value = Project Cost/Number of Shares Outstanding

Change in Book Value = 60/6 = $10

New Book Value per Share = 8 + 10 = $18

New Book Value = $18 per share

a2.

New EPS = (3,000,000 + 840,000)6,000,000

New EPS = $0.64 per share

a3.

Earlier EPS = 3000000/6000000 = $0.50 per share

P/E Ratio = 30/0.50 = 60

New Price = 60(0.64)

New Price = $38.40

a4

New Market to Book Ratio = 38.4/18

New Market to Book Ratio = 2.13

b.

Net Income = 3,000,000 + 840,000

Net Income = $3,840,000