Problem 20-10 Dilution Teardrop, Inc., wishes to expand its facilities. The comp
ID: 2738643 • Letter: P
Question
Problem 20-10 Dilution Teardrop, Inc., wishes to expand its facilities. The company currently has 10 million shares outstanding and no debt. The stock sells for $20 per share, but the book value per share is $47. Net income for Teardrop is currently $2.7 million. The new facility will cost $28 million, and it will increase net income by $340,000. The par value of the stock is $1 per share. Assume a constant price–earnings ratio.
a-1. Calculate the new book value per share. Assume no change is applied to determine the number of new shares. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Book value $ per share
a-2. Calculate the new total earnings. (Enter your answer in dollars, not millions of dollars, (e.g., 1,234,567). Do not round intermediate calculations and round your answer to the nearest whole dollar amount. (e.g., 32))
Total earnings $
a-3. Calculate the new EPS. Assume incremental net income to be considered. (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
EPS $ per share
a-4. Calculate the new stock price. Assume incremental net income to be considered. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Stock price $
a-5. Calculate the new market-to-book ratio. (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Market-to-book ratio
b. What would the new net income for the company have to be for the stock price to remain unchanged? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Net income $
Explanation / Answer
New Book value per share = ($470+28+0.34) million/11.4million =498.34/11.4 = $43.71
New total earnings =$ 2.7 +0.34 million = 3.04 million$
New EPS = total earnings / total shares = 3.04 million/ 11.4 million = $0.27
New share price = old price + incremental income per share = 20 + (0.34/11.4) = $20.03
Market to book value = 20.03/43.71 = 0.4582
New net income should be same as that of the old to become the price unchanged.
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