Eaton, Inc., wishes to expand its facilities. The company currently has 7 millio

Question

Eaton, Inc., wishes to expand its facilities. The company currently has 7 million shares outstanding and no debt. The stock sells for $40 per share, but the book value per share is $8. Net income is currently $3.5 million. The new facility will cost $40 million, and it will increase net income by $440,000. 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 $ 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

a1)If investment amount is raised through equity total new outstanding shares
=7mn+(40mn/40)= 8mn
new Book value per share= [(7mn*8)+(1mn*40)]/8
=$12

a2)
total earnings= 3.5mn+0.44mn=$3.94mn

a3)Old EPS= 3.5mn/7mn=0.5
P/E= 40/.5=80
New EPS= 3.94mn/8mn=0.4925

a4)Assuming p/E remains constant
New share price= (0.4925*80)=39.4

a5)New market to book ratio=39.4/12=$3.283

b)For thsi P/E and EPS should be constant .
Net Income= 8mn shares*0.5=$4mn

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