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?
a. $23.00 b. $25.56 c. $28.40 d. $31.24 e. $34.36
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