Answer to Question #6533 in Economics of Enterprise for LaMarcus Streeter
4. Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?
The right answer is C. $28.40
We used the following equation: Market Capitalization = (Shares Outstanding * Current Share Price) + Current Long-term Debt. We can derive Current Share Price from here and it will be: (900-90-110)25 = $28