Question

A firm has a market value equal to its book value. currently, the firm has excess cash of $2,100 and other assets of $7,500. equity is worth $9,600. the firm has 800 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? multiple choice

O $1.44
O $3.59
O $3.36
O $2.15
O $1.13

Answer 1

To calculate the new earnings per share after a stock repurchase, divide the net income by the new number of shares outstanding. In this scenario, the company would repurchase 175 shares, leaving 625 shares outstanding, resulting in a new EPS of $1.44.

Step-by-step explanation:

The question posed pertains to the impact of a stock repurchase on the earnings per share (EPS) of a company. In this scenario, a firm with a market value equal to its book value has $2,100 in excess cash and $7,500 in other assets. With equity valued at $9,600 and 800 shares outstanding, it is considering using its excess cash to repurchase stock. With net income of $900, the calculation of the new EPS after the repurchase can be determined.

• The number of shares repurchased would be the excess cash of $2,100 divided by the current stock price, which equals the book value or market value per share. Given that the equity value is $9,600 and there are 800 shares, the price per share is $9,600 / 800 = $12.
• The $2,100 excess cash can repurchase $2,100 / $12 = 175 shares.
• After repurchasing 175 shares, there will be 800 - 175 = 625 shares outstanding.
• The new EPS will be the net income of $900 divided by the new number of shares outstanding, i.e., 625, so the new EPS = $900 / 625 = $1.44.

The correct answer to the question is $1.44, which is the new EPS after the firm uses its excess cash for a stock repurchase.