Question

Financial Alchemists (FA) has a market value equal to its book value. Currently, FA has cash on hand of $2400 and other assets of $8,500. Equity is worth $6,000. FA has 200 shares of stock outstanding and net income of $1200. How much greater will earnings per share be if FA uses its cash to repurchase some of its own stock?

$10.00

$6.00

EPS won't increase, it will decline

$4.00

$0.00

Answer 1

The increase in EPS is computed as shown below:

= New EPS - Current EPS

New EPS is computed as follows:

= Net income / Number of shares outstanding

Number of shares outstanding is computed as follows:

= Existing number of shares - Shares repurchased

= 200 shares - Cash / Value per share

Value per share is computed as follows:

= Equity / Number of shares

= $ 6,000 / 200

= $ 30

So, the number of shares is computed as follows:

= 200 shares - $ 2400 / $ 30

= 120 shares

So, the new EPS will be as follows:

= 1,200 / 120

= $ 10

So, the increase in EPS will be as follows:

= $ 10 - Net income / Number of shares

= $ 10 - $ 1,200 / 200

= $ 4

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