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Q: Question pertaining to Share Price ( No Answer,   0 Comments )
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 Subject: Question pertaining to Share Price Category: Business and Money > Finance Asked by: sophisticated1-ga List Price: \$40.00 Posted: 08 Oct 2006 09:24 PDT Expires: 11 Oct 2006 16:59 PDT Question ID: 771718
 ```Here is recent financial data on J and L,Inc. Stock price \$40 Market value of firm \$400,000 Number of shares 10,000 Earnings per share \$4 Book net worth \$500,000 Return on investment 2% quarterly. J and L,Inc. has not performed spectacularly to date. However, it wishes to issue new shares to obtain \$100,000 to finance expansion into a promising market. Pisa?s financial advisers think a stock issue is a poor choice because, among other reasons, ?sale of stock at a price below book value per share can only depress the stock price and decrease shareholders?wealth.? To prove the point they construct the following example: "Suppose 2,500 new shares are issued at \$40 and the proceeds are invested. (Neglect issue costs.) Suppose return on investment does not change. Then Book net worth = \$600,000 Total earnings = .0824(600,000) = \$49,440 Thus, EPS declines, book value per share declines, and share price will decline proportionately to \$38.40.? Evaluate this argument with particular attention to the assumptions implicit in the numerical example.``` Clarification of Question by sophisticated1-ga on 09 Oct 2006 22:58 PDT `Would it be possible to get an answer by (1300) 1:00pm on October 10, please?` Clarification of Question by sophisticated1-ga on 10 Oct 2006 14:52 PDT ```Here is recent financial data on J and L Construction, Inc. Stock price \$40 Market value of firm \$400,000 Number of shares 10,000 Earnings per share \$4 Book net worth \$500,000 Return on investment 2% quarterly. J and L has not performed spectacularly to date. However, it wishes to issue new shares to obtain \$100,000 to finance expansion into a promising market. J and L financial advisers think a stock issue is a poor choice because, among other reasons, ?sale of stock at a price below book value per share can only depress the stock price and decrease shareholders? wealth.? To prove the point they construct the following example: ?Suppose 2,500 new shares are issued at \$40 and the proceeds are invested. (Neglect issue costs.) Suppose return on investment does not change. Then Book net worth = \$600,000 Total earnings = .0824(600,000) = \$49,440 Thus, EPS declines, book value per share declines, and share price will decline proportionately to \$38.40.? Evaluate this argument with particular attention to the assumptions implicit in the numerical example. If feedback could be posted within 24 hours that would be fantastic!```