Question

In: Accounting

Your company has the following balance sheet characteristics: Total Assets = $1,000,000,000; Current Liabilities = $100,000,000;...

Your company has the following balance sheet characteristics:

Total Assets = $1,000,000,000;

Current Liabilities = $100,000,000;

Long Term Debt = $300,000,000;

Current Book Value Equity = $600,000,000;

Shares Outstanding = 80,000,000;

Current Market Price, P0 = $30:

What is the current Book Value per share (Book Value), the current Market Value per Share and the Market Value Added per share? Does your firm create wealth for stockholders?

Book Value per Share =

Market Value per Share =

Market Value Added per Share =

Does your firm create wealth for stockholders?

​

Solutions

Expert Solution

Book Value per Share =

=$600,000,000/80,000,000

= $7.5 per share

Market Value Per Share =

Market Value per share is generally the price at which shares are being sold in the market, viz. Market Value per Share is Market Price Per Share

Market Value Per Share =$30

Total Market Value = Market Value per Share * Shares Outstanding

Total Market Value = $30*80,000,000 = $2,400,000,000

Market Value Added per Share

Market Value Added per Share = Market Value per Share - Book Value per Share

Market Value Added per Share = $30 - $7.5 = $22.5 per Share

or

Market Value Added per Share = (Total Market Value - Total Book Value of Equity)/Commonstock Outstanding

Market Value Added per Share = ($2,400,000,000 - $600,000,000)/80,000,000

Market Value Added per Share = $22.5 per Share

Wealth Creation for Shareholders

Yes, we can conclude by analysing above calculations that firm creates wealth for its shareholders. Firms book value per share is $7.5 per Share, whereas its shares are being sold in market currently at $30 per share, thust Higher the Market Price, More the Shareholders Wealth. Additionally higher market price also leads to Higher P/E Ratio.

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ekkarill92 answered 8 months ago
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