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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
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