Question

I NEED STEP BY STEP SOLUTIONS FOR EACH PART. DO NOT SKIP ANY PART. ANSWERS TO EACH ARE MARKED IN BOLD

18. Determine the market value of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of “comparable” firm = $500,000.

                        a.   $4 million

                        b.   $7.5 million

                        c.   $10 million

                        d.   $12.5 million

                        e.   $15 million

19. Determine the net income of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of “comparable” firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm.

                        a.   $450,000

                        b.   $500,000

                        c.   $550,000

                        d.   $600,000

                        e.   $700,000

20. Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20.00 per shares; 100,000 shares outstanding; and net income of $50,000.

                        a.   $1.0 million

                        b.   $1.4 million  

                        c.   $1.6 million

                        d.   $2.0 million

Answer 1

Solution:

Net Income to value of target firm = $200,000 / $4,000,000 = 5%

Net Income for comparable firm = $500,000

As net income to value will remain the same for comparable firm, therefore value of comparable firm = $500,000 / 5% = $10,000,000 = $10 million

Hence option C is the right choice.

Solution 19:

Net Income to value of target firm = $200,000 / $4,000,000 = 5%

Value of comparable firm = Outstanding shares * Stock price = 300000 * $30 = $9,000,000

As net income to value will remain the same for comparable firm, therefore net income of comparable firm = $9,000,000 * 5% = $450,000

Hence option a is the right choice.

Solution 20:

Value of comparable firm = 100000*20 = $2,000,000

Net income of comparable firm = $50,000

Net income to value of comparable firm = $50,000 / $2,000,000 = 2.5%

Net Income expected to be for target venture after 4 years = $40,000

Therefore future value of target venture = $40,000/2.5% = $1,600,000 = $1.6 million

Hence option c is the right choice.