Eaton, Inc., wishes to expand its facilities. The company currently has 5 millio

Question

Eaton, 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 $820,000. Assume a constant price-earnings ratio a-1 Calculate the new book value per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Book value a-2 Calculate the new total earnings. Total earnings a-3 Calculate the new EPS. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) EPS 0.768 per share a-4 Calculate the new stock price. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price a-5 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.) Market-to-book ratio b. 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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to nearest whole dollar amount, e.g., 32.) Net income

Explanation / Answer

(a-1). New book value per share = $13.60

Explanation;

New share will be ($45000000 / $36) = 1250000 shares

Thus total shares will be (5000000 + 1250000) = 6250000

New book value per share (5000000 * $8) + (1250000 * $36) / 6250000

= ($40000000 + $45000000) / 6250000

= $13.60

(a-2). New total earnings = $4.82 million

Explanation;

Current net income = $4 million

Increase in net income = $820000

Thus new total earnings ($4000000 + $820000) = $4820000 or $4.82 million

(a-3). New EPS = $0.7712

Explanation;

New EPS = New total earnings / Total number of outstanding shares

Increased net income = $4820000

Total number of outstanding shares = 6250000

Thus new EPS ($4820000 / 6250000) = $0.7712

(a-4). New stock price = $34.70

Explanation;

Stock price = P/E ratio * New EPS

Thus first of all let’s calculate /PE ratio;

P/E ratio = Market price of share / Current EPS

Market price of share = $36

Current EPS ($4000000 / 5000000) = $0.8

Thus, P/E ratio will be ($36 / $0.8) = $45

Now, let’s calculate new stock price;

New stock price $45 * $0.7712 = $34.70

(a-5). New market-to-book ratio = $2.5515

Explanation;

New market-to-book ratio = New share price / New book value of the share

New share price is = $34.70

New book value of the share is = $13.60

Thus, New market-to-book ratio will be ($34.70 / $13.60) = $2.5515

(b). New income = $5000000

Explanation;

New income = Total number of outstanding shares * Current EPS

Total number of outstanding shares = 6250000

Current EPS = $0.8

Net income will be (6250000 * $0.8) = $5000000

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