Question 1

Karina's Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina's common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding?

Accepted Answer

The answer of Karina's Caribbean Foods had total assets as...

Question 2

________ is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

Accepted Answer

The P/E multiple (Price-to-Earnings multiple) is a measure of the value of a company. It's calculated by dividing the company's market value per share by its earnings per share. If investors value the earnings of a given firm the same way they do the average firm in the industry, then the P/E multiple can be used as a guide to the firm's value. This is because the P/E ratio represents what investors are willing to pay for each dollar of earnings of a company, and the industry average provides a benchmark for comparison.

Question 3

Due to growing demand for computer software, the Perry Company has had a very successful year and expects its earnings per share to grow by 25 percent to reach $5.50 for this year. Estimate the price of the company's common stock assuming the industry's price/earning ratio is 12.

Accepted Answer

The answer of Due to growing demand for computer software,...

Question 4

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average PE multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

Accepted Answer

The answer of At year end, Tangshan China Company balance...

Question 5

________ is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

Accepted Answer

Liquidation value refers to the amount that common stockholders are expected to receive after the sale of assets, repayment of creditors and preferred stockholders, and the division of remaining funds among them. It represents the actual value of a company's common stock in the event of liquidation.

Question 6

Scooter World has estimated the market value of its assets to be $1,250,000. What is the value of Scooter World's common stock if it has $900,000 in liabilities, $50,000 in preferred stock, and 7,500 shares of common stock outstanding?

Accepted Answer

The answer of Scooter World has estimated the market value...

Question 7

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

Accepted Answer

Future stock price = (P/E multiple x earnings per share) + expected dividend per share 
= (15 x $2) + $1 
= $31 
Therefore, we can expect the stock price to be $30 or more, making option D the best choice.

Question 8

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

Accepted Answer

To calculate the liquidation value per share of common stock, we need to subtract the total liabilities from the total assets and divide by the number of shares outstanding.

Liquidation Value per Share = (Total Assets - Total Liabilities) / Number of Shares Outstanding

= ($60 million - $45 million) / 1,000,000

= $15 million / 1,000,000

= $15 per share

However, since Tangshan can sell its assets for $52.5 million, we use this amount for the calculation instead:

Liquidation Value per Share = ($52.5 million - $45 million) / 1,000,000

= $7.5 per share

Therefore, the answer is B) $7.50.

Question 9

BFG, Inc. stock currently sells for $75 per share. The firm has total assets of $1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has 10,000 shares of common stock outstanding,
(a) what is the book value of each share of common stock?
(b) is the stock overvalued or undervalued in the marketplace?
(c) what might be the reason(s) for your answer in (b).

Accepted Answer

The answer of BFG, Inc. stock currently sells for $75...

Question 10

Which of the following valuation methods is superior to the others in the list since it considers expected earnings?

Accepted Answer

P/E multiple takes into account the expected earnings of a company, making it a superior valuation method compared to liquidation value, book value, and present value of the interest.

Question 11

Nico Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is $500,000, and Nico has a half million shares of stock outstanding, what is the value of Nico's stock?

Accepted Answer

The correct answer is A. The value of Nico's stock is $2.43.The value of the firm's equity is the present value of the firm's free cash flows. The free cash flows for the next five years are $200,000 per year. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. The firm's average cost of capital is 15 percent. The market value of the firm's debt is $500,000, and Nico has a half million shares of stock outstanding.The value of the firm's equity is:$$V_e = \frac{FCF}{r - g} - D$$where:* $V_e$ is the value of the firm's equity* $FCF$ is the free cash flow* $r$ is the average cost of capital* $g$ is the growth rate of free cash flows* $D$ is the market value of the firm's debtPlugging in the numbers, we get:$$V_e = \frac{200,000}{0.15 - 0.05} - 500,000 = 2,000,000$$The value of Nico's stock is:$$V_s = \frac{V_e}{N}$$where:* $V_s$ is the value of Nico's stock* $N$ is the number of shares outstandingPlugging in the numbers, we get:$$V_s = \frac{2,000,000}{500,000} = 4$$Therefore, the value of Nico's stock is $4.

Question 12

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

Accepted Answer

The answer of Based on analysis of the company and...

Question 13

________ is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.

Accepted Answer

Book value represents the net value of a company's assets after all liabilities have been paid, which is what would be distributed to common stockholders if the company were liquidated at its accounting value.

Question 14

The book value per share of common stock is the amount per share of common stock that would be received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

Accepted Answer

The book value per share of common stock is calculated by dividing the total book value of common equity by the number of outstanding shares of common stock. It represents the net assets of the company that belong to its common shareholders. If the company were to sell all its assets and pay off its liabilities, the remaining assets would be divided among the common shareholders based on their ownership percentages. Thus, the book value per share of common stock reflects the theoretical amount each common shareholder would receive in such a scenario.

Question 15

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

Accepted Answer

The liquidation value per share is based on the estimated market value of the firm's assets, not their accounting value, after settling liabilities and preferred stock, with the remainder distributed to common stockholders.

Question 16

BFG has current assets of $800,000, which can be liquidated at 90 percent of book value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000 shares of common stock outstanding. What is the liquidation value per share of common stock?

Accepted Answer

The answer of BFG has current assets of $800,000, which...

Question 17

Patrick Company expects to generate free-cash of $120,000 per year forever. If the firm's required return is 12 percent, the market value of debt is $300,000, the market value of preferred stock is $70,000, and the company has 100,000 shares of stock outstanding. What is the value of Patrick's stock?

Accepted Answer

The answer of Patrick Company expects to generate free-cash of...

Question 18

China Imports currently has 2,000 shares of common stock outstanding. The firm has assets of $200,000 and total liabilities including preferred stock of $75,000. Calculate the book value per share of China Imports common stock.

Accepted Answer

The answer of China Imports currently has 2,000 shares of...

Question 19

The use of the ________ is especially helpful in valuing firms that are not publicly traded.

Accepted Answer

The answer of The use of the ________ is especially...

Question 20

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Based on this information, Tangshan's book value per share of common stock is ________.

Accepted Answer

The book value per share is calculated as (Total Assets - Total Liabilities) / Number of Common Shares. Here, it is ($60 million - $45 million) / 1,000,000 = $15.00 per share.

Quiz 7: Stock Valuation