Question
In: Finance
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= |
| 74 |
| 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= |
| 18 |
| & 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 |
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