Based on the corporate valuation model, the value of a company's operations is $1,200 million.The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations.The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity.If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?
A)$24.90
B)$27.67
C)$30.43
D)$33.48
E)$36.82

Question

Quizplus · Accepted Answer

The value of the company's operations is $1,200 million, which includes all assets and liabilities related to operations. Therefore, we need to adjust the balance sheet values to reflect only the assets and liabilities related to operations:

Accounts receivable + Inventory = $80 million + $60 million = $140 million 
Short-term investments = $100 million 
Accounts payable + Notes payable = $90 million + $120 million = $210 million 
Long-term debt + Preferred stock + Retained earnings + Total common equity = $300 million + $50 million + $180 million + $800 million = $1,330 million

Now, we need to subtract the non-operating assets and liabilities from the total adjusted value of operations:

Total adjusted value of operations = $1,330 million - $100 million = $1,230 million

Using the corporate valuation model:

Value of operations = (number of shares)(price per share)
$1,230 million = (30 million)(price per share)
Price per share = $41

Therefore, the best estimate of the stock's price per share is $27.67 (rounded to two decimal places), which is the answer choice B.

Based on the Corporate Valuation Model, the Value of a Company's