Teardrop, Inc., wishes to expand its facilities. The company currently has 10 mi

Question

Teardrop, Inc., wishes to expand its facilities. The company currently has 10 million shares outstanding and no debt. The stock sells for $40 per share, but the book value per share is $51. Net income for Teardrop is currently $3.9 million. The new facility will cost $45 million, and it will increase net income by $420,000. The par value of the stock is $1 per share. Assume a constant price–earnings ratio

. a-1. Calculate the new book value per share. Assume no change is applied to determine the number of new shares. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Book value $ per share

a-2. Calculate the new total earnings. (Enter your answer in dollars, not millions of dollars, (e.g., 1,234,567). Do not round intermediate calculations and round your answer to the nearest whole dollar amount. (e.g., 32)) Total earnings $

a-3. Calculate the new EPS. Assume incremental net income to be considered. (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616)) EPS $ per share

a-4. Calculate the new stock price. Assume incremental net income to be considered. (Do not round intermediate calculations and round your final 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? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Explanation / Answer

Here assumin the new investment is raised by equity shares
no of shares raised= 45*10^6/40
=1,125,000

Since the par value per share is $1, the old book value of the shares is the current
number of shares outstanding.

New outstanding shares= 10mn+1.125mn=11.125mn shares

a-1)New book value per share= =(10mn*51)+(1125000*40)]/11.125mn
=$49.89

a2)New total earnings=3.9mn+420,000=4.32mn

a-3)new EPS= new earnings/new outstanding shares
=4.32mn/11.125mn
=$0.3883

a-4)New stock price (assuming P/E remains constant)
P/E (before investment)=40/(3.9mn/10mn)
=102.56

New Price=New EPS*(P/E)
=0.39*102.56
=$39.83

a-5)New market to book ratio
=39.83/49.89
=0.7983

b)NI=no of new shares* old EPS

=1.125mn*(3.9mn/10mn)

=438,750

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