chapter 1

chapter 1 - E1.3 Buy or Sell? Value = $850 + $675 = $1,525...

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E1.3 Buy or Sell? Value = $850 + $675 = $1,525 million Value per share = $1,525/25 = $61 Market price = $45 Therefore, BUY! E1.5. Enterprise Market Value: General Mills and Hewlett-Packard (a) Market value of the equity = $80 × 150.0 million shares = $ 12.000 billion Book value of total (short-term and long-term) debt = 2.317 Enterprise value $ 14.317 billion Note three points: (i) Total market value of equity = Price per share × Shares outstanding. (ii) The book value of debt is typically assumed to equal its market value, but financial statement footnotes give market value of debt to confirm this. (iii) The book value of equity is not a good indicator of its market value. The price-to-book ratio for the equity can be calculated from the numbers given: 12,000/164.2=73.1. (The student might well conjecture why this is so high. Leverage plays a big role: see Chapter 13). (b) This question provokes the issue of whether debt held as assets is part of enterprise value (a part of operations) or effectively a reduction of the net debt claim on
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chapter 1 - E1.3 Buy or Sell? Value = $850 + $675 = $1,525...

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