13 A firm has a market value equal to its book value Current

13. A firm has a market value equal to its book value. Currently, the firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? a. $1.20 b. $1.50 c, $1.80 $2.00

Solution

a. Computation of Stock Price

Stock Price = Equity / No. of Shares O/s = $6000 / 500 = $12 Per Shares

b. Number of Shares Purchased

Shares Purchased = Cash / Stock Price = $600 / $12 = 50 Shares

c. New EPS

New EPS = Net Income / Number of Shares O/s = $900 / 450 = $2.00