Question

In: Finance

Estimated SVA ( shareholder value-added) is $ 67.43 Value of equity/# number of share outstanding If...

Estimated SVA ( shareholder value-added) is $ 67.43 Value of equity/# number of share outstanding

  1. If the market value of equity is $50/share, what recommendations would you make to top management ?
  2. if the market value of equity is $70/share, what recommendations would you make to top management ?

Solutions

Expert Solution

1. In this case, the shareholders value added in 67.43, but market value of the equity is only 50, so there is an undervaluation of the shares in the market and it will mean that the company is not able to convince the market in order to have a proper valuation.

Recommendations I would like to make to the top level management would be to buy the shares in the the market and increase its overall stock because it would be helpful for the management as it will maximize earning capability of the management in the long run.

Management can also provide better growth perspective and better communication to the shareholder in order to make them aware about the futuristic growth prospect of the company and better value for the company in the market.

Share purchase by the management in the market will be meaning that market will also interpret that the company is highly bullish on its own perspective so there would be an indication for the shareholders who want to invest in the company in order to gain appreciation in their overall investment because there is a huge discrepancy in the price and the value of the company.

2. When the Market value of equity is 70 and shareholders value added is 67.43, then it will mean that the company is highly overvalued in the market and market is providing it with the premium valuation.

This can also mean that the company is a leader in its overall segment and the market is trying to discount it's future growth prospects and it is providing a higher valuation than the shareholders value added.

The recommendation for the management would be to keep the market optimistic about the growth prospects by delivering good results and continue to grow future and require larger market share and continue to be a leader of the particular segment so it will be helpful in shareholders to maintain the trust and they will still be providing the company with a higher valuation than the shareholders value.


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