A firm has a market value equal to its book value.Currently,the firm has excess cash of $400 and other assets of $7,600.Equity is worth $8,000.The firm has 250 shares of stock outstanding and net income of $900.The firm has decided to pay out all of its excess cash as a cash dividend.What will the earnings per share be after the dividend is paid?

Question

Quizplus · Accepted Answer

The firm has $8,000 of equity, $400 of excess cash, and $7,600 of other assets. The total assets are $8,000. The firm has 250 shares of stock outstanding, so the book value per share is $8,000 / 250 = $32. The firm has net income of $900, so the earnings per share are $900 / 250 = $3.60. After the dividend is paid, the firm will have $8,000 of equity, $0 of excess cash, and $7,600 of other assets. The total assets will still be $8,000. The firm will still have 250 shares of stock outstanding, so the book value per share will still be $32. The firm will have net income of $900, so the earnings per share will still be $3.60.

A Firm Has a Market Value Equal to Its Book