A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?
A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3 million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A company with 2 million shares outstanding and no debt currently has a net income of $4 million. The company is considering an investment that will cost $3
million and increase net income by $900,000. The company's stock sells for $10 per share but its book value per share is $20. Assume a constant price-earnings
ratio. 1. Does dilution take place? 2. What would the new net income for the company have to be for the stock price to remain unchanged?
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