Eaton, Inc., wishes to expand its facilities. The company currently has 5 millio
ID: 2743569 • Letter: E
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 $10. Net income is currently $3 million. The new facility will cost $45 million, and it will increase net income by $660,000. Assume a constant price-earnings ratio.
Calculate the new book value per share. (Do not round intermediate calculations and round your 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 answer to 4 decimal places, e.g., 32.1616.)
Calculate the new stock price. (Do not round intermediate calculations and round your 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, e.g., 1,234,567. Do not round intermediate calculations and round your answer to nearest whole dollar amount, e.g., 32.)
a-1Calculate the new book value per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Answer to Part a-1) New Book Value per share
Current outstanding shares = 5 million
New Issued shares = 45 million/ 36 = 1.25 million
Therefore, the no of shares outstanding after stock offer = 5 million + 1.25 million = 6.25 million
New Book Value per share = [(5 million * 10) + (1.25 million * 36)] / 6.25 million
New Book Value per share = $ 15.20
Answer to Part a2) New Total Earnings
New Total earnings = Current earning + expected increase in earning
New Total Earning = 3,000,000 + 660,000
New Total Earning = $ 3,6600,000
Answer to Part a-3 ) New EPS
New EPS = New Earning / New no of outstanding Shares
New EPS = 3,660,000 / 6,250,000
New EPS = $ 0.5856
Answer to Part a-4) New Stock Price
Current EPS = 3 million/ 5 million = $ 0.60
Current P/E Ratio = 36/0.60 = $ 60
New EPS = $ 0.5856
Assuming the P/E Remains Constant, the New Stock price = P/E * New EPS
New Stock Price = 60 * 0.5856 = $ 35.14
Answer to Part a-5) New Market to Book Ratio
New Market to Book ratio = New Stock Price / New Book Value per share
New Market to Book ratio = 35.14/15.20
New Market to Book ratio = 2.3118
Answer to Part b)
For the price to remain unchanged when the P/E ratio is constant, EPS must remain constant.
The new net income will be the new number of shares outstanding times the current EPS
New Net Income = (6.25 millions shares) x $0.60/share = $ 10.42 million
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