The founder of Alchemy Products Inc. discovered a way to turn gold into lead and patented...

The founder of Alchemy Products Inc. discovered a way to turn gold into lead and patented this new technology. He then formed a corporation and invested $1,500,000 in setting up a production plant. He believes that he could sell his patent for $72 million.

a. What is the book value of the firm? (Enter your answer in dollars not in millions.)

b. What is the market value of the firm? (Enter your answer in dollars not in millions.)

c. If there are two million shares of stock in the new corporation, what would be the book value per share? (Round your answer to 2 decimal places.)

d. If there are two million shares of stock in the new corporation, what would be the price per share? (Round your answer to 2 decimal places.)

Solutions

Expert Solution

Solution :

a. The Book value of the Firm is equal to the Investment made in setting up a production plant.

As per the information given in the question we have

Investment made in setting up a production plant = $ 1,500,000

Thus the Book value of the firm = $ 1,500,000

b. The market value of the Firm is equal to the total of Investment made in setting up a production plant and the estimated selling price of the Patent in the market

= Investment made in setting up a production plant + Estimated selling price of the Patent in the market

As per the information given in the question we have

Investment made in setting up a production plant = $ 1,500,000

Estimated selling price of the Patent in the market = $ 72,000,000

Thus the market value of the firm = $ 1,500,000 + $ 72,000,000 = $ 73,500,000

c. The formula for calculating the Book value per share = Book value of the firm / No. of shares of stock of the corporation

As per the information available we have

Book value of the firm = $ 1,500,000 ; No. of shares of stock of the corporation = 2,000,000

Thus the Book value per share = $ 1,500,000 / 2,000,000 = $ 0.75

d. The formula for calculating the Price per share = Market value of the firm / No. of shares of stock of the corporation

As per the information available we have

Market value of the firm = $ 73,500,000 ; No. of shares of stock of the corporation = 2,000,000

Thus the Price per share = $ 73,500,000 / 2,000,000 = $ 36.75

jeff jeffy answered 2 months ago

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