Question

A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $7,800. Equity is worth $9,000. The firm has 600 shares of stock outstanding and net income of $760. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

Answer 1

Answer: $1.46

Explanation:

Earnings per share = Net Income/Number of shares

Value of shares at current = 9,000/600

= $15 a share

Excess cash is $1,200.

Using that, the following number shares can be purchases;

= 1,200/15

= 80 shares

New number of shares = 600 - 80

= 520 shares

New EPS

= 760/520

= $1.46