A Kinston firm has a market value equal to its book value. Currently, the firm has excess cash of $800 and other assets of $4,200. Equity is worth $5,000. The firm has 200 shares of stock outstanding and net income of $350. What will the new earnings per share be if the firm uses all its excess cash to complete a stock repurchase?

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Quizplus · Accepted Answer

The firm's excess cash is $800, which it uses to repurchase stock. The total equity value is $5,000, so after spending $800 on repurchasing shares, $4,200 remains as equity. With 200 shares initially outstanding, the repurchase reduces the number of shares. The repurchase amount ($800) at the current equity value per share ($5,000 / 200 = $25) means 32 shares ($800 / $25) are repurchased, leaving 168 shares outstanding (200 - 32). The net income is $350, so the new earnings per share (EPS) is $350 / 168 = $2.08.

A Kinston Firm Has a Market Value Equal to Its