You are doing some analysis on the has a market value that is equal to its book value. Currently, the firm has excess cash of $1,000 million and other assets of $9,000 million. Equity is worth $10,000 million. The firm has 700 million shares of stock outstanding and net income of $1,575 million. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

the new earnings per share will be 231 cents

Explanation:

Earnings per share is Earnings attributable to each Common Share.

Earnings Per Share = Earnings attributable to Holders of Common Stock/ Weighted Average Number of Common Shares

                                = $1,575 million/ (700 million-250/10000×700 million)

                                = $1,575 million/(700 million-17,2 million)

                                = 231 cents

Earnings per share is $2.31

Explanation:

value of one share=$10,000 million/700 million=$14.29

25% of excess cash =25%*$1000 million=$250 million

Number of shares repurchased=$250 million/$14.29=17.5 million

Outstanding shares after share repurchase=700 million-17.5 million

                                                                       =682.5 million

Earnings per share =earnings attributable to common stock/number of common stock

earnings stands at $1,575 million

number of common stock 682.5 million

Earnings per share=1,575 million/682.5 million

Earnings per share=$2.31 or 231 cents

The new earnings per share is $2.31 or 231 cents as shown in the step by step analysis above.