The Down Under is an all-equity firm with 330,000 shares of stock outstanding.The book value per share is $21 and the market value per share is $54.The current net income is $412,500.An expansion project will cost $1.6 million.Assume the price-earnings ratio remains constant.What must the new net income be for the market price to remain at $54?

Question

Quizplus · Accepted Answer

Current EPS = $412,500/330,000 = $1.25New shares outstanding = 330,000 + $1,600,000/$54 = 359,630Project income needed = ($1.25 × 359,630)= $449,537

The Down Under Is an All-Equity Firm with 330,000 Shares