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Homework answers / question archive / A Kinston firm has a market value equal to its book value
A Kinston firm has a market value equal to its book value. Currently, the firm has excess cash of $800 and other assets of $4,200. Equity is worth $5,000. The firm has 200 shares of stock outstanding and net income of $350. What will the new earnings per share be if the firm uses all its excess cash to complete a stock repurchase?
A. $1.51 B. $1.75 C. $1.96 D. $2.00
E. $2.08
Answer
E.
Explanation
Computation of New Earnings per Share if Firm uses all its excess cash to complete a stock repurchase:
Before stock repurchase:
Value of Equity = $5,000
Number of shares outstanding = 200
Price per share = Value of Equity / Number of shares outstanding
Price per share = $5,000 / 200
Price per share = $25
Excess Cash = $800
Number of shares repurchased = Excess Cash / Price per share
Number of shares repurchased = $800 / $25
Number of shares repurchased = 32 shares
After repurchase:
Number of shares outstanding = 200 - 32
Number of shares outstanding = 168
Net Income = $350
EPS = Net Income / Number of shares outstanding
EPS = $350 / 168
EPS = $2.08
