Answer to Question #13224 in Management for John

Question

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

Answer 1

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