Question

Wayne, 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 $10. Net income is currently $3 million. The new facility will cost $45 million, and it will increase net income by $660,000. Assume a constant price-earnings ratio.

a-1.	Calculate the new book value per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a-2.	Calculate the new EPS. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
a-3.	Calculate the new stock price. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a-4.	Calculate the new market-to-book ratio. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
b.	What would the new net income for the company have to be for the stock price to remain unchanged? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

     

Answer 1

Wayne has 5,000,000 shares outstanding and wishes to add a facility for $45,000,000 at a price of $36. Therefore number of shares added is 1250000 (45000000 / 36). Total number of shares outstanding now is (5000000 + 1250000) 6250000. .

New book value per share = (Pre new equity issue share value + Share Value of new equity) / Total outstanding shares after new equity issue

New book value per share = ( 5000000*10 + 1250000*36 ) / 6250000

New book value per share = $15.20

a-2 New Net Income = 3000000 + 660000

New Net Income = $3660000

Number of shares outstanding = 6250000

new EPS = 3660000 / 6250000

new EPS = 0.5856

a3) New stock price

Old stock price = $36

Net Income was = 3000000

Number of shares outstanding was 5000000

Old EPS = 3000000 / 5000000

Old EPS = 0.60

Old PE = 36 / 0.60

Old PE = 60 times

PE remains the same

Therefore, with new earnings per share = 0.5856

Price would be

60 = Price / 0.5856

Price = 0.5856 * 60

New Price = $35.14

a4) New market to book value

= New Price / New book value

= 35.14 / 15.20

= 2.3116

New market to book value is 2.3116

b) For the stock price to remain unchanged, the PE ratio of 60 remains the same and EPS of 0.60 should also remain same with new shares outstanding of 6250000.

Net Income should be = Total number of shares outstanding * EPS

Net Income = 6250000 * 0.60

Net Income = $3750000