Teardrop, Inc., wishes to expand its facilities. The company currently has 12 mi

Question

Teardrop, Inc., wishes to expand its facilities. The company currently has 12 million shares outstanding and no debt. The stock sells for $43 per share, but the book value per share is $10. Net income is currently $5.0 million. The new facility will cost $60 million, and it will increase net income by $560,000. Assume a constant price

Teardrop, Inc., wishes to expand its facilities. The company currently has 12 million shares outstanding and no debt. The stock sells for $43 per share, but the book value per share is $10. Net income is currently $5.0 million. The new facility will cost $60 million, and it will increase net income by $560,000. Assume a constant price

Explanation / Answer

a1) total share outstanding = 12 million, book value = 10, total equity = 120 million

60 million debt for new faclity = 120 million - 60 million/12 million = $ 5 per share

Book value per share = $ 5

a2) new total earnings would be 5 million + 560,000

= 5,560,000

a3) NEw EPS = Total earnings / No of shares outstanding

= 5,560,000/12,000,000 = $ 0.46

a4)  PE ratio is constant = market value per share/EPS

= $43/0.46 = 103.2

New market value would be 103.2 * new EPS that is 0.46

$47.82

a5)Calculate the new market-to-book rati0

= 47.82/5

=9.56

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.