Answer:
a-1. Calculate the new book value per share.
current book value = stocks outstanding x book value = 5,000,000 x $10 = $50,000,000
new book value = $50,000,000 + $50,000,000 = $100,000,000
new stocks issued = $50,000,000 / $40 = 1,250,000
total stocks outstanding = 5,000,000 + 1,250,000 = 6,250,000
new book value per stock = $100,000,000 / 6,250,000 = $16
a-2. Calculate the new EPS.
old EPS = $4,000,000 / 5,000,000 = $0.80 per stock
new EPS = $4,850,000 / 6,250,000 = $0.776 per stock
a-3. Calculate the new stock price.
price to earnings ratio = $40 / $0.80 = 50
new stock price:
50 = new stock price / $0.776
new stock price = 50 x $0.776 = $38.80
a-4. Calculate the new market-to-book ratio.
market to book ratio = market capitalization / book value = $242,500,000 / $100,000,000 = 2.425
b. What would the new net income for the company have to be for the stock price to remain unchanged?
0.8 = net income / 6,250,000
net income = 6,250,000 x 0.8 = $5,000,000
