A Firm Has a Market Value Equal to Its Book

question 57

Multiple Choice

A firm has a market value equal to its book value. Currently,the firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

• A) $1.20
• B) $1.50
• C) $1.80
• D) $2.00
• E) $2.40

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Definitions:

Equity Method

An accounting technique used to record investments in associated companies, recognizing the investor's share of the investees' income.

Retrospective Change

An adjustment applied to prior period financial statements to correct an error or reflect a new accounting policy as if it had always been applied.

Goodwill

An intangible asset that represents the surplus value of a company beyond its physical assets and liabilities, often arising from factors such as brand reputation, customer relationships, or intellectual property during an acquisition.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities, representing ownership interest spread among individual shareholders.