Teardrop, Inc., wishes to expand its facilities. The company currently has 15 mi

Question

Teardrop, Inc., wishes to expand its facilities. The company currently has 15 million shares outstanding and no debt. The stock sells for $23 per share, but the book value per share is $8. Net income is currently $4.4 million. The new facility will cost $30 million, and it will increase net income by $360,000. Assume a constant price

Teardrop, Inc., wishes to expand its facilities. The company currently has 15 million shares outstanding and no debt. The stock sells for $23 per share, but the book value per share is $8. Net income is currently $4.4 million. The new facility will cost $30 million, and it will increase net income by $360,000. Assume a constant price

Explanation / Answer

a)

1). Book value per share = Cost of new facility / Shares outstanding

Therefore, New Book value per share = 30,000,000/15,000,000

Hence , New Book Value per share = $ 2

2).Total earnings = Current earnings + Net Income estimated

Hence, Total earnings = $ 4,400,000 + 360,000

Hence, Total new earnings + $4,760,000 (Net Income)

3). EPS ( Earning Per Share ) = Net Income / Outstanding Shares

Hence EPS = 4,760,000 /15,000,000

Hence New EPS = $0.32

4). Price Earning Ratio= Stock price per share / EPS

Here Price Earning ratio is constant.

So last Year Price earning ratio =8 / (4,400,000/15,000,000)

Hence, Last year Price earning ratio = 8 /0.29 = $79.31

Therefore, 95.10 = Stock price per share / 0.32

Hence, Stock price per share = 95.10 * 0.32 = $30.43

5). Market to Book ratio = Market Value of share / Book Value of share

Hence, Market to Book Ratio = 23/ 2 =11.5

b)

The net income would have to be $ 4,760,000

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