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Stock price $ 56 Number of shares 50,000 Total assets $ 8,800,000 Total liabilities $ 5,100,000...

Stock price $ 56 Number of shares 50,000 Total assets $ 8,800,000 Total liabilities $ 5,100,000 Net income $ 900,000 The company is considering an investment that has the same PE ratio as the firm. The cost of the investment is $640,000, and it will be financed with a new equity issue. The return on the investment will equal the company's current ROE. What is the current book value per share and the book value per share with the investment? What is the current market-to-book ratio and the market-to-book ratio with the investment? What is the current EPS and the EPS with the investment? What is the NPV of this investment? I found all answers except - New market to book and NPV. Please help!

There are no cash flows - in answer to the comment. This is all the info I have.

Stock price	56
Number of shares	50,000
Total assets	8,800,000
Total liabilities	5,100,000
Net income	900,000
cost of investment	640,000
Equity	3700000.000
ROE	0.2432
new net income	4340000.0000
NI	1055675.6757
EPS0	18.00
# new shares	11428.5714
EPS1	17.19
(P/E)0	3.2586
P1	56.00
BVPS0	74.00
BVPS1	70.65
market to book0	0.7568
market to book1	0.7926
NPV	0.0000

Solutions

Expert Solution

1..Current book value per share=

Total equity/No.of shares

Current Total Equity=Total assets-Total liabilities

ie.8800000-5100000=

3700000

Current BV/share=3700000/50000=

Workings :

No.of new shares issued at the current stock price

640000/56=

11429

Total no.of shares after the investment

50000+11429=

61429

Book value per share with the investment

New total Equity=New Total assets-Total liabilities

ie. (8800000+640000)-5100000=

4340000

New BV /share=4340000/61429

70.65

Workings For 2..

2..Firm's current P/E ratio

Market Price per share/Earnings per share

ie. 56/(900000/50000)=

3.11

Firm's current ROE

Net Income/Total equity

Current Net Income=900000

Current Total Equity=Total assets-Total liabilities

ie.8800000-5100000=

3700000

So,Current ROE=900000/3700000=

24.3243%

New Investment=640000

ROI=New Investment*Current ROE%

ie. 640000*24.3243%=

155676

New total Earnings=

900000+155676=

1055676

No.of new shares issued at the current stock price

640000/56=

11429

Total no.of shares after the investment

50000+11429=

61429

New EPS=1055648/61429=

17.18

Given the P/E to remain the same

ie. 3.11

so, market price after the investment will be

MPS/EPS=3.11

ie. MPS/17.18=3.11

MPS=17.18*3.11=

53.43

Current market-to-book ratio

Mkt. Value/Book Value (per share)

56/74=

0.7568

& Market-to-book ratio with the investment

53.43/70.65=

0.7563

3..Current EPS

EPS=Net Income/No.of shares

900000/50000=

& EPS with the investment

New EPS=1055676/61429=

17.19

NPV of this investment

-640000+155676=

-484324

Answers Summary	Current	After Inv.
Book Value	74	70.65
Market to Book ratio	0.7568	0.7563
EPS	18	17.19
NPV		-484324

jeff jeffy answered 10 months ago

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