Question

Book and liquidation value   The balance sheet for Gallinas Industries is as​ follows,

Gallinas Industries Balance Sheet December 31

Assets			Liabilities and Stockholders' Equity
Cash	$40,000		Accounts payable	$100,000
Marketable securities	60,000		Notes payable	30,000
Accounts receivable	120,000		Accrued wages	30,000
Inventories	160,000		Total current liabilities	$160,000
Total current assets	$380,000		Long-term debt	$180,000
Land and buildings (net)	$150,000		Preferred stock	$80,000
Machinery and equipment	250,000		Common stock (10,000 shares)	260,000
Total fixed assets (net)	$400,000		Retained earnings	100,000
Total assets	$780,000		Total liabilities and stockholders' equity	$780,000

Additional information with respect to the firm is​available:

1. Preferred stock can be liquidated at book value.

2. Accounts receivable and inventories can be liquidated at 90% of book value.

3. The firm has 10,000 shares of common stock outstanding.

4. All interest and dividends are currently paid up.

5. Land and buildings can be liquidated at 130% of book value.

6. Machinery and equipment can be liquidated at 70% of book value.

7. Cash and marketable securities can be liquidated at book value.

Given this​ information, answer questions A-C in EXCEL showing all excel formulas for each field. I cannot understand the answer if I can't see the formulas. Thank you:

a.  What is Gallinas​ Industries' book value per share​?

b.  What is its liquidation value per share​?

c. ​ Compare, contrast, and discuss the values found in parts a and b.

Answer 1

Answer :

a.   Book value per share:

b. Liquidation value:

Cash	$40,000	Liquidation Value of Assets	722,000
Marketable
Securities	60,000	Less: Current Liabilities	(160,000)
Accounts Rec.		Long-Term Debt	(180,000)
(0.90 × $120,000)	108,000	Preferred Stock	(80,000)
Inventory		Available for CS	$302,000
(0.90 × $160,000)	144,000
Land and Buildings
(1.30 × $150,000)	195,000
Machinery & Equip.
(0.70 × $250,000)	175,000
Liq. Value of Assets	$722,000

Liquidation value per share = Liquidation value of assets / Number of shares outstanding

  

c.   Liquidation value is below book value per share and represents the minimum value for the firm. It is possible for liquidation value to be greater than book value if assets are undervalued. Generally, they are overvalued on a book value basis, as is the case here.