Question

Wayne, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and no debt. The stock sells for $36 per share, but the book value per share is $8. Net income is currently $4 million. The new facility will cost $45 million, and it will increase net income by $800,000. Assume a constant price-earnings ratio.

a-1. Calculate the net book value per share. (Do not round intermediate calculations and round your answer to 2 decimal places

a-2. Calculate the new EPS. (Do not round intermediate calculations and round your answer to 4 decimal places

a-3. Calculate the new stock price. (Do not round intermediate calculations and round your answer to 2 decimal place

a-4. Calculate the new market-to-book ratio. (Do not round intermediate calculations and round your answer to 4 decimal places

b. What would the new net income for the company have to be for the stock price to remain unchanged?

Answer 1

a-1.
New shares to be issued = 45000000 / 36	1250000
Total shares after issue = 5000000 + 1250000	6250000
New book value per share = ( (5000000*8)+(1250000*36) ) / 6250000	13.60
a-2.
New EPS = ( Current earnings + Increase in earnings ) / Total shares after issue = ( 4000000+ 800000 ) / 6250000	0.768
a-3.
Current EPS = Current earnings / Current shares = 4000000 / 5000000	0.8
Current PE ratio = Market price / Current EPS = 36 / 0.8	45
New stock price = Current PE ratio * New EPS = 45 * 0.768	34.56
a-4.
New market to book ratio = New stock price / New book value per share = 34.56 / 13.60	2.5412
b.
New net income should be = Current EPS * Total shares after issue = 0.80 * 6250000	5000000