Question

A company is considering investing in a new project that will cost $6,589,490 and increase net income by 8.18%. This project will be completely funded by issuing new equity shares. Currently, the firm has 2,196,490 common shares outstanding with a market price of $32.91 per share. The current earnings per share are $1.79. What will be the earnings per share if the project is implemented?

	$1.73
	$1.77
	$1.82
	$1.86
	$1.91

Answer 1

Solution :

Calculation of net income after the project is implemented :

As per the information given in the question

The current earnings per share = $ 1.79 ; Number of common shares outstanding = 2,196,490   ;

Thus current net income = The current earnings per share * Number of common shares outstanding

= $ 1.79 * 2,196,490

= $ 3,931,717.10

Further as per the information given in the question,

If the project is implemented the net income would increase by 8.18 % = 0.0818

Thus the net income after the project is implemented = Current Net Income * ( 1 + 0.0818 )

= $ 3,931,717.10 * 1.0818

= $ 4,253,331.5588

= $ 4,253,332 ( When rounded off to the nearest dollar )

Thus the net income after the project is implemented is = $ 4,253,332

Calculation of common shares outstanding after the project is implemented :

Number of common shares outstanding before the project is implemented = 2,196,490

Cost of the new project = $ 6,589,490 ;   Current market price per share = $ 32.91   ;

The project will be completely funded by issuing new equity shares.

Assuming each new share is issued at market price, the number of new equity shares issued to fund the project = Cost of the new project / Current market price per share

= $ 6,589,490 / $ 32.91

= 200,227.5904

Thus the number of new equity shares issued to fund the project = 200,227.5904

Therefore the common shares outstanding after the project is implemented = Number of common shares outstanding before the project is implemented + Number of new equity shares issued to fund the project

= 2,196,490 + 200,227.5904

= 2,396,717.5904

= 2,396,718 ( when rounded off to the nearest number )

The common shares outstanding after the project is implemented = 2,396,718

Calculation of earnings per share if the project is implemented :

The formula for calculating the Earnings per share is

= Net Income / No. of common shares outstanding

As per the information available we have

The net income after the project is implemented is = $ 4,253,332

The common shares outstanding after the project is implemented = 2,396,718

Applying the above information in the formula we have the earnings per share after the project is implemented as

= $ 4,253,332 / 2,396,718

= $ 1.7746

= $ 1.77 ( when rounded off to two decimal places )

Thus the earnings per share if the project is implemented = $ 1.77

The solution is Option 2 = $ 1.77