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EPS and PE Ratio

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Walker machine tools has 5 million shares of common stock outstanding. The current market price of Walker common stock is $42 per share rights-on. The company's net income this year is $15 million. A rights offering has been announced in which 500,000 new shares will be sold at $36.50 per share. The subscription price plus 10 rights is needed to buy one of the new shares.

a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?

b. What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering? (assume there is no change in the market value of the stock, except for the change when the stock begins trading ex-rights.) Round answers to two places after the decimal point.

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The solution examines EPS and PE ratios.

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a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?
Net Income = 15 million
Number of shares outstanding = 5 million
EPS = Net Income / Number of shares outstanding = 15 million/5 million ...

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