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Allison's has a market value equal to its book value
Allison's has a market value equal to its book value. Currently, the firm has excess cash of $1,100 and other assets of $12,400. Equity is worth $13,500. The firm has 2,500 shares of stock outstanding and net income of $10,800. What will be the new earnings per share if the firm uses its excess cash to complete stock repurchase?
Expert Solution
Computation of the new earnings per share:-
Price per share = Value of equity / Number of shares outstanding
= $13,500 / 2,500
= $5.40
Number of shares repurchased = Excess cash / price per share
= $1,100 / $5.40
= 203.70 shares Or 203 shares
Number of shares after repurchased = 2,500 - 203
= 2,296 shares
New earnings per share = Total earnings / Number of shares after repurchased
= $10,800 / 2,296
= $4.70 per share
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