Teardrop, Inc., wishes to expand its facilities. The company currently has 15 mi
ID: 2650413 • 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?earnings ratio.
Calculate the new book value per share. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Calculate the new total earnings.
Calculate the new EPS. (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Calculate the new stock price. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Calculate the new market-to-book ratio.(Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
What would the new net income for the company have to be for the stock price to remain unchanged?(Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to nearest whole dollar amount.)
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?earnings ratio.
Explanation / Answer
Answer:
Given:
Current Net income (A)
$ 4,300,000
Current Number of shares (B)
15,000,000
Current EPS C = A/B
$ 0.29
Current Market Price (D)
$ 25
Current Price earnings ratio (E) = D/C
87.21
Current Book value Per share (F)
$ 7
Current Number of shares (B)
15,000,000
Current Total Book value (G) = F*B
$ 105,000,000
Cost of new facility (H)
$ 45,000,000
Increase in net income (I)
$ 480,000
New Total Book Value (J) =G+H+I
$ 150,480,000
Current Number of shares (B)
15,000,000
Ans-a-1:
New book value per share (K) = J/B
$ 10.03
Current Net income (A)
$ 4,300,000
Increase in net income (I)
$ 480,000
Ans-a-2:
New total earnings (L) = A+I
$ 4,780,000
Current Number of shares (B)
15,000,000
Ans-a-3:
New EPS (M) = L /B
$ 0.3187
Current Price earnings ratio (E) = D/C
87.21
Ans-a-4:
New stock price (N) =M*E
$ 27.79
Given:
Current Net income (A)
$ 4,300,000
Current Number of shares (B)
15,000,000
Current EPS C = A/B
$ 0.29
Current Market Price (D)
$ 25
Current Price earnings ratio (E) = D/C
87.21
Current Book value Per share (F)
$ 7
Current Number of shares (B)
15,000,000
Current Total Book value (G) = F*B
$ 105,000,000
Cost of new facility (H)
$ 45,000,000
Increase in net income (I)
$ 480,000
New Total Book Value (J) =G+H+I
$ 150,480,000
Current Number of shares (B)
15,000,000
Ans-a-1:
New book value per share (K) = J/B
$ 10.03
Current Net income (A)
$ 4,300,000
Increase in net income (I)
$ 480,000
Ans-a-2:
New total earnings (L) = A+I
$ 4,780,000
Current Number of shares (B)
15,000,000
Ans-a-3:
New EPS (M) = L /B
$ 0.3187
Current Price earnings ratio (E) = D/C
87.21
Ans-a-4:
New stock price (N) =M*E
$ 27.79
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