A firm has a market value equal to its book value,excess cash of $1,000,and equity worth $17,800.The firm has 5,000 shares of stock outstanding and net income of $31,200.What will be the new earnings per share if the firm uses its excess cash to complete a stock repurchase?

Question

Quizplus · Accepted Answer

First, we need to calculate the current earnings per share (EPS):
EPS = Net Income / Number of Shares Outstanding
EPS = $31,200 / 5,000 = $6.24

Next, we need to calculate the new number of outstanding shares after the stock repurchase:
New Number of Shares Outstanding = Number of Shares Outstanding - (Excess Cash / Stock Price)
Stock Price = Equity / Number of Shares Outstanding
Stock Price = $17,800 / 5,000 = $3.56
New Number of Shares Outstanding = 5,000 - ($1,000 / $3.56)
New Number of Shares Outstanding = 2,809

Finally, we can calculate the new EPS:
New EPS = Net Income / New Number of Shares Outstanding
New EPS = $31,200 / 2,809 = $11.08

Therefore, the new EPS after the stock repurchase will be $6.61, which is answer choice C.

A Firm Has a Market Value Equal to Its Book