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 $780,000. 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.)

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 $780,000. Assume a constant price-earnings ratio.

Explanation / Answer

Calculate the new book value per share.

Number of shares after offering =45000000/36+5000000=6250000

new book value per share=((8*5000000)+45000000)/6250000=$13.60 Per share

Calculate the new total earnings.

new total earnings=4000000+780000=$4780000

Calculate the new EPS

new total earnings/Number of shares after offering

=$4780000/6250000=.7648

Calculate the new stock price

PE ratio =Price/EPS

EPS=4000000/5000000=.80

PE ratio =36/.80=45

  Stock price=45*.7648=$34.42

Calculate the new market-to-book ratio

Market price per share/Book value per share

=34.52/13.60=2.5306

What would the new net income for the company have to be for the stock price to remain unchanged?

The new net income must be the new number of shares outstanding times the current EPS

=6250000/.7648=8172071

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