Arnold's Construction is an all-equity firm with 80,000 shares of stock outstanding.The book value per share is $23,and the market value per share is $50.The current net income is $216,000.The firm is considering a new project that will cost $2.6 million and will increase net income by $120,000.The project will be all-equity financed.The project will be financed with new equity shares.The current earnings per share is ________ and it will be ________ if the project is accepted.

Question

Quizplus · Accepted Answer

Current earnings per share = Net Income / Number of Shares Outstanding
Current earnings per share = $216,000 / 80,000 = $2.70

If the project is accepted, the new net income will be:
New net income = $216,000 + $120,000 = $336,000

The number of shares outstanding will increase due to the new equity financing required for the project. Let's calculate the new number of shares outstanding:

New shares = Project Cost / Market Value per Share
New shares = $2.6 million / $50 = 52,000 shares

Total number of shares outstanding after the project:
Total shares outstanding = 80,000 + 52,000 = 132,000 shares

New earnings per share = New Net Income / Total Shares Outstanding
New earnings per share = $336,000 / 132,000 = $2.55

Therefore, the answer is D, with a current earnings per share of $2.70 and a new earnings per share of $2.55 if the project is accepted.

Arnold's Construction Is an All-Equity Firm with 80,000 Shares of Stock