Question

A firm has a market value equal to its book value. Currently, the firm has excess cash of $700 and other assets of $6,300. Equity is worth $7,000. The firm has 600 shares of stock outstanding and net income of $1,512. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

Answer 1

As, Market value of equity is same as its Book Value,

Equity price per share = Equity Value/No of Shares

=$7000/600 shares

=$11.6666 per share

Firm uses 25% of its excess cash to repurchase shares,

Amount of Shares repurchase = $700*25%

=$175

No of shares Repurchase = $175/$11.6666 per share

= 15 shares

No of shares outstanding after repurchase = 600 shares -15 shares

=585 shares

New Earnings per Shares = Net Income/No of shares outstanding after repurchase

=$1512/585 shares

= $2.5846 per share