4 May, 23:06

# 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?

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1. 4 May, 23:12
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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