Question

Teardrop Inc. wishes to expand its facilities.

The company currently has 10 million shares outstanding and no debt.

The stock sells for $20 per share but the book value per share is $47.

Net income for Teardrop is currently $2.7 million.

The new facility will cost $28 million and it will increase net income by $340,000.

The par value of the stock is $1 per share.

Assume a constant price-earnings ratio.

Required:

1. a) Calculate the net book value per share.

Assume no change is applied to determine the number of new shares.

1. b) Calculate the new total earnings.

(Enter your final answer in dollars)

1. c) Calculate the new EPS.

Assume incremental net income to be considered.

1. d) Calculate the new stock price.

Assume incremental net income to be considered.

1. e) Calculate the new market-to-book ratio.

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

Answer 1