Teardrop, Inc., wishes to expand its facilities. The company currently has 15 mi
ID: 2650376 • Letter: T
Question
Teardrop, Inc., wishes to expand its facilities. The company currently has 15 million shares outstanding and no debt. The stock sells for $25 per share, but the book value per share is $7. Net income is currently $4.3 million. The new facility will cost $45 million, and it will increase net income by $480,000. 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 $25 per share, but the book value per share is $7. Net income is currently $4.3 million. The new facility will cost $45 million, and it will increase net income by $480,000. Assume a constant price
Explanation / Answer
Answer
Particulars
Amount
No. Of Shares (a)
15000000
Market Price of share (b)
25
Book value per share (C)
7
Net income (d)
4300000
Earning per share (d/a) (e)
0.29
Price earning ratio (b/e) (f)
87.21
New facility cost (g)
45000000
New shares to be issued
4500000
(Assuming Rs. 10 par value)
Increase in net income (h)
480000
New Net income (i) (d+h)
4780000
Answer No. 1
New book value per share
7.72
[(15000000*7)+ (480000+45000000)]/(15000000 +4500000)
Answer No. 2
New total earning (i)
4780000
Answer No.3
New EPS ( i/a)
0.25
(4780000/19500000)
Answer No. 4
New stock price
21.38
(New EPS * P/E ratio)
(0.25*87.21)
Answer No. 5 (a)
New market to book ratio
2.77
New market value of stock/ New book value of stock
(21.38/7.72)
Answer No . 5(b)
Unchanged market price
25
P/E ratio
87.21
earning per share tobe maintained (o)
0.29
Total no of shares (old + new) (p)
19500000
New Net income to be maintained (o*p)
5590000
Particulars
Amount
No. Of Shares (a)
15000000
Market Price of share (b)
25
Book value per share (C)
7
Net income (d)
4300000
Earning per share (d/a) (e)
0.29
Price earning ratio (b/e) (f)
87.21
New facility cost (g)
45000000
New shares to be issued
4500000
(Assuming Rs. 10 par value)
Increase in net income (h)
480000
New Net income (i) (d+h)
4780000
Answer No. 1
New book value per share
7.72
[(15000000*7)+ (480000+45000000)]/(15000000 +4500000)
Answer No. 2
New total earning (i)
4780000
Answer No.3
New EPS ( i/a)
0.25
(4780000/19500000)
Answer No. 4
New stock price
21.38
(New EPS * P/E ratio)
(0.25*87.21)
Answer No. 5 (a)
New market to book ratio
2.77
New market value of stock/ New book value of stock
(21.38/7.72)
Answer No . 5(b)
Unchanged market price
25
P/E ratio
87.21
earning per share tobe maintained (o)
0.29
Total no of shares (old + new) (p)
19500000
New Net income to be maintained (o*p)
5590000
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