The Jenkins Co. is considering a project which requires the purchase of $315,000
ID: 2679783 • Letter: T
Question
The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. Equity shares will be issued as the sole means of financing the project. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?
Number of shares outstanding 50,000
Book value $500,000
Market value $720,000
Net Income $45,000
Return on equity 0.09
price-earnings ratio 16
earnings per share $0.90
a) $10.00 b) $10.37 c) $12.07 d) $14.68 e) $15.04
please show the work
Explanation / Answer
Current market value per share = $720,000 / 50,000 = $14.40
Number of new shares needed = $315,000 / $14.40 = 21,875 shares
New market value per share = ($720,000 + $315,000 + $20,000) / (50,000 + 21,875)
New market value per share = $14.68
d) $14.68.......(answer)
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