A firm has a market value equal to its book value. Currently, the firm has excess cash of $300 and other assets of $6,200. Equity is worth $5,000. The firm has 500 shares of stock outstanding and net income of $720. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

new earnings per share is $1.53

Explanation:

Given data

excess cash = $300

Equity is worth = $5,000

other assets = $6,200

stock outstanding = 500 shares

net income = $720

to find out

new earnings per share

solution

we know that equity per value is Equity / stock outstanding

that is

equity per value = (5000 / 500) = 10

equity per value = $10

and

we can purchase equity with excess cash $300 that is

= excess cash / equity per value

purchase equity with excess cash = (300 / 10) = 30

purchase equity with excess cash = 30 shares

so

after repurchase we have balance share is = (500 - 30) = 470

balance share = 470 shares

so that

new earnings per share will be = net income / balance share

new earnings per share = (720 / 470) = 1.53

new earnings per share is $1.53