SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
SOLUTIONS TO
EXERCISES AND CASES
For
FINANCIAL STATEMENT ANALYSIS AND SECURITY
VALUATION
Stephen H. Penman
Fifth Edition
CHAPTER ONE
Introduction to Investing and Valuation
Concept
Questions
1
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.1.Fundamental risk arises from the inherent risk in the business
–
from sales revenue falling or expenses rising unexpectedly, for
example.
Price risk is the risk of prices deviating from fundamental value.
Prices
are subject to fundamental risk, but can move away from
fundamental
value, irrespective of outcomes in the fundamentals. When an
investor
buys a stock, she takes on fundamental risk – the stock price could
drop
because the firm’s operations don’t meet expectations – but she
also runs
the (price) risk of buying a stock that is overpriced or selling a stock
C1.2.A
that beta technology measures the risk of an investment and the
required return that
is underpriced. the risk
Chapter requires. The
19 elaborates andcapital
Figureasset
19.5 pricing
(in Chapter
model
19)
(CAPM) is a beta technology; is measures risk (beta) and the
gives a display.
required
return for the beta. An alpha technology involves techniques that
identify
mispriced stocks that can earn a return in excess of the required
return
(an alpha return). See Box 1.1. The appendix to Chapter 3
elaborates on
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
2
beta technologies.
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.3.This statement is based on a statistical average from the
historical
data: The return on stocks in the U.S. and many other countries
during
the twentieth century was higher than that for bonds, even though
there
were periods when bonds performed better than stocks. So, the
argument
goes, if one holds stocks long enough, one earns the higher return.
However, it is dangerous making predictions from historical
averages
when risky investment is involved. Averages from the past are not
guaranteed in the future. After all, the equity premium is a reward
for
risk, and risk means that the investor can get hit (with no guarantee
of
10-year period, and the past 25-year period up to 2010,
always
bonds getting a higher return). The investor who holds stocks (for
outperformed stocks—not very pleasant for the post war baby-
retirement,
boomer at for example) may well find that her stocks have fallen
when
retirement age at that point who had held “stocks for the long run.”
she comes to liquidate them. Indeed, for the past 5-year period,
the pastfor the “long-run” may take a lot of time (and “in the long
Waiting
run
we are all dead”).
3
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
The historical average return for equities is based on buying
stocks
at different times, and averages out “buying high” and “buying low”
(and selling high and selling low). An investor who buys when
prices are
high (or is forced to sell when prices are low) may not receive the
typical average return. Consider investors who purchased shares
during
the stock market bubble in the 1990s: They lost considerable
amount of
their
C1.4.Aretirement
passive “nest egg”
investor overnot
does theinvestigate
next few years. SeeatBox
the price 1.1.he
which
buys
an investment. He assumes that the investment is fairly
(efficiently)
priced and that he will earn the normal return for the risk he takes
on.
The active investor investigates whether the investment is
efficiently
priced. He looks for mispriced investments that can earn a return
in
excess of the normal return. See Box 1.1.
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
4
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.5.This is not an easy question at this stage. It will be answered
in full
as the book proceeds. But one way to think about it is as
follows: If
an investor expects to earn 10% on her investment in a stock,
then
earnings/price should be 10% and price/earnings should be 10.
Any
return above this would be considered “high” and any return
below
it “low.” So a P/E of 33 (an E/P yield of 3.03%) would be
considered high and a P/E of 8 (an E/P yield of 12.5%) would
be
considered low. But we would have to also consider how
accounting
rules measure earnings: If accounting measures result in lower
earnings (through high depreciation charges or the expensing
of
research and development expenditure, for example) then a
normal
P/E ratio might be higher than 10. And one also has to consider
growth: If earnings are expected to be higher in the future than
current earnings, the E/P ratio should be lower than this 10%
benchmark (and the corresponding
5 P/E higher). In early 2012,
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
the
S&P 500 P/E ratio stood at 14.4.
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.6.The firm has to repurchase the stock at the market price, so
the
shareholder will get the same price from the firm as from
another
investor. But one should be wary of trading with insiders (the
management) who might have more information about the
firm’s
prospects than outsiders (and might make stock repurchases
when
they consider the stock to be underpriced). Some argue that
stock
repurchases are indicative of good prospects for the firm that
are not
reflected
C1.7. in the market
Yes. Stocks price,
would be and firms
efficiently repurchase
priced stocks to
at the agreed
signal
fundamental
these
valueprospects. Firmsprice
and the market buy stocks
would because
impound they think
all the the stock
information
isthat
cheap.
investors are using. Stock prices would change as new
information
arrived that revised the fundamental value. But that new
information would be unpredictable beforehand. So changes
in
“random walk.”
prices would also be unpredictable: stock prices would follow a
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
6
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.8.Index investors buy a market index--the S&P 500, say--at
its
current price. With no one doing fundamental analysis, no one
would
have any idea of the real worth of stocks. Prices would wander
aimlessly, like a “random walk.” A lone fundamental investor
might
have difficulty making money. He might discover that stocks are
“fundamental value.”
mispriced, but could not be sure that the price will ultimately
return to
C1.9.a. If the market price, P, is efficient (in pricing intrinsic value)
and
V is a good measure of intrinsic value, the P/V ratio should be 1.0.
The
graph does show than the P/V ratio oscillates around 1.0 (at least
up to
the bubble years). However, there are deviations from 1.0. These
deviations must either be mispricing (in P) that ultimately gets
corrected
b. Yes, you would have done well up to 1995 if P/V is
an
so the ratioofreturns
indication to 1.0,
mispricing. or a the
When poorP/V
measure of V. below 1.0,
ratio drops
prices
increase (as the market returns to fundamental value), and when
the
ratioP/V
rises above 1.0, prices decrease (as the market
returns to
7
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
fundamental value). A long position in the first case and a short
position
in the latter case would earned positive returns. Of course, this
strategy
is only as good as the V measure used to estimate intrinsic value.
c. Clearly, shorting Dow stocks during this period would have
been
1999, the P/V ratio failed to revert back to 1.0 even though it
very painful, even though the P/V ratio rose to well above 1.0. Up to
deviated
significantly from 1.0. This illustrates price risk in investing (see
question C1.1 and Box 1.1). Clearly, buying stocks when the P/V
ratio
was at 1.2 would clearly involved a lot of price risk: The P/V ratio
says
stocks are too expensive and you’d be paying too much. But
selling
short at a P/V ratio of 1.2 in 1997 would also have borne
considerable
price risk, for the P/V ratio increase even further subsequently. In
bubbles or periods of momentum investing, overpriced stocks get
more
overpriced, so taking a position in the hope that prices will return
toChapter 5 covers the calculation of P/V ratios
here.
fundamental value is risky. Only after the year 2000 did prices
finally
8
turn down, and the P/V ratio fell back towards 1.0.
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
Exercises
Drill Exercises
E1.1.Calculating Enterprise Value
This exercise tests the understanding of the basic value
relation:
Enterprise Value = Value of Debt + Value of Equity
Enterprise Value = $600 + $1,200 million
= $1,800 million
(Enterprise value is also referred to as the value of the firm,
and
sometimes as the value of the operations.)
E1.2.Calculating Value Per Share
Rearranging the value
relations,
Equity Value = Enterprise Value – Value of
Debt
Equity Value = $2,700 - $900 million
= $1,800
Value per share on 900 million shares = $1,800/900 =
$2.00
E1.3 Buy or Sell?
Value = $850 + $675
9
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
= $1,525 million
Value per share = $1,525/25 =
$61
Market price = $45
Therefore, BUY!
Applications
E1.4.Finding Information on the Internet: Dell Inc., General
Motors, and Ford
This is an exercise in discovery. The links on the book’s web
site
will help with the search.
E1.5.Enterprise Market Value: General Mills and Hewlett-Packard
(a) General Mills
Market value of the equity = $36.50 $23,535,2
644.8 million
million shares
Book value = (short-term and
of total 6,885.1
long-
term) debt =
Enterprise value $30,420.3
million
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
10
SOLUTIONS TO
EXERCISES AND CASES
For
FINANCIAL STATEMENT ANALYSIS AND SECURITY
VALUATION
Stephen H. Penman
Fifth Edition
CHAPTER ONE
Introduction to Investing and Valuation
Concept
Questions
1
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.1.Fundamental risk arises from the inherent risk in the business
–
from sales revenue falling or expenses rising unexpectedly, for
example.
Price risk is the risk of prices deviating from fundamental value.
Prices
are subject to fundamental risk, but can move away from
fundamental
value, irrespective of outcomes in the fundamentals. When an
investor
buys a stock, she takes on fundamental risk – the stock price could
drop
because the firm’s operations don’t meet expectations – but she
also runs
the (price) risk of buying a stock that is overpriced or selling a stock
C1.2.A
that beta technology measures the risk of an investment and the
required return that
is underpriced. the risk
Chapter requires. The
19 elaborates andcapital
Figureasset
19.5 pricing
(in Chapter
model
19)
(CAPM) is a beta technology; is measures risk (beta) and the
gives a display.
required
return for the beta. An alpha technology involves techniques that
identify
mispriced stocks that can earn a return in excess of the required
return
(an alpha return). See Box 1.1. The appendix to Chapter 3
elaborates on
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
2
beta technologies.
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.3.This statement is based on a statistical average from the
historical
data: The return on stocks in the U.S. and many other countries
during
the twentieth century was higher than that for bonds, even though
there
were periods when bonds performed better than stocks. So, the
argument
goes, if one holds stocks long enough, one earns the higher return.
However, it is dangerous making predictions from historical
averages
when risky investment is involved. Averages from the past are not
guaranteed in the future. After all, the equity premium is a reward
for
risk, and risk means that the investor can get hit (with no guarantee
of
10-year period, and the past 25-year period up to 2010,
always
bonds getting a higher return). The investor who holds stocks (for
outperformed stocks—not very pleasant for the post war baby-
retirement,
boomer at for example) may well find that her stocks have fallen
when
retirement age at that point who had held “stocks for the long run.”
she comes to liquidate them. Indeed, for the past 5-year period,
the pastfor the “long-run” may take a lot of time (and “in the long
Waiting
run
we are all dead”).
3
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
The historical average return for equities is based on buying
stocks
at different times, and averages out “buying high” and “buying low”
(and selling high and selling low). An investor who buys when
prices are
high (or is forced to sell when prices are low) may not receive the
typical average return. Consider investors who purchased shares
during
the stock market bubble in the 1990s: They lost considerable
amount of
their
C1.4.Aretirement
passive “nest egg”
investor overnot
does theinvestigate
next few years. SeeatBox
the price 1.1.he
which
buys
an investment. He assumes that the investment is fairly
(efficiently)
priced and that he will earn the normal return for the risk he takes
on.
The active investor investigates whether the investment is
efficiently
priced. He looks for mispriced investments that can earn a return
in
excess of the normal return. See Box 1.1.
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
4
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.5.This is not an easy question at this stage. It will be answered
in full
as the book proceeds. But one way to think about it is as
follows: If
an investor expects to earn 10% on her investment in a stock,
then
earnings/price should be 10% and price/earnings should be 10.
Any
return above this would be considered “high” and any return
below
it “low.” So a P/E of 33 (an E/P yield of 3.03%) would be
considered high and a P/E of 8 (an E/P yield of 12.5%) would
be
considered low. But we would have to also consider how
accounting
rules measure earnings: If accounting measures result in lower
earnings (through high depreciation charges or the expensing
of
research and development expenditure, for example) then a
normal
P/E ratio might be higher than 10. And one also has to consider
growth: If earnings are expected to be higher in the future than
current earnings, the E/P ratio should be lower than this 10%
benchmark (and the corresponding
5 P/E higher). In early 2012,
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
the
S&P 500 P/E ratio stood at 14.4.
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.6.The firm has to repurchase the stock at the market price, so
the
shareholder will get the same price from the firm as from
another
investor. But one should be wary of trading with insiders (the
management) who might have more information about the
firm’s
prospects than outsiders (and might make stock repurchases
when
they consider the stock to be underpriced). Some argue that
stock
repurchases are indicative of good prospects for the firm that
are not
reflected
C1.7. in the market
Yes. Stocks price,
would be and firms
efficiently repurchase
priced stocks to
at the agreed
signal
fundamental
these
valueprospects. Firmsprice
and the market buy stocks
would because
impound they think
all the the stock
information
isthat
cheap.
investors are using. Stock prices would change as new
information
arrived that revised the fundamental value. But that new
information would be unpredictable beforehand. So changes
in
“random walk.”
prices would also be unpredictable: stock prices would follow a
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
6
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
C1.8.Index investors buy a market index--the S&P 500, say--at
its
current price. With no one doing fundamental analysis, no one
would
have any idea of the real worth of stocks. Prices would wander
aimlessly, like a “random walk.” A lone fundamental investor
might
have difficulty making money. He might discover that stocks are
“fundamental value.”
mispriced, but could not be sure that the price will ultimately
return to
C1.9.a. If the market price, P, is efficient (in pricing intrinsic value)
and
V is a good measure of intrinsic value, the P/V ratio should be 1.0.
The
graph does show than the P/V ratio oscillates around 1.0 (at least
up to
the bubble years). However, there are deviations from 1.0. These
deviations must either be mispricing (in P) that ultimately gets
corrected
b. Yes, you would have done well up to 1995 if P/V is
an
so the ratioofreturns
indication to 1.0,
mispricing. or a the
When poorP/V
measure of V. below 1.0,
ratio drops
prices
increase (as the market returns to fundamental value), and when
the
ratioP/V
rises above 1.0, prices decrease (as the market
returns to
7
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
fundamental value). A long position in the first case and a short
position
in the latter case would earned positive returns. Of course, this
strategy
is only as good as the V measure used to estimate intrinsic value.
c. Clearly, shorting Dow stocks during this period would have
been
1999, the P/V ratio failed to revert back to 1.0 even though it
very painful, even though the P/V ratio rose to well above 1.0. Up to
deviated
significantly from 1.0. This illustrates price risk in investing (see
question C1.1 and Box 1.1). Clearly, buying stocks when the P/V
ratio
was at 1.2 would clearly involved a lot of price risk: The P/V ratio
says
stocks are too expensive and you’d be paying too much. But
selling
short at a P/V ratio of 1.2 in 1997 would also have borne
considerable
price risk, for the P/V ratio increase even further subsequently. In
bubbles or periods of momentum investing, overpriced stocks get
more
overpriced, so taking a position in the hope that prices will return
toChapter 5 covers the calculation of P/V ratios
here.
fundamental value is risky. Only after the year 2000 did prices
finally
8
turn down, and the P/V ratio fell back towards 1.0.
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
Exercises
Drill Exercises
E1.1.Calculating Enterprise Value
This exercise tests the understanding of the basic value
relation:
Enterprise Value = Value of Debt + Value of Equity
Enterprise Value = $600 + $1,200 million
= $1,800 million
(Enterprise value is also referred to as the value of the firm,
and
sometimes as the value of the operations.)
E1.2.Calculating Value Per Share
Rearranging the value
relations,
Equity Value = Enterprise Value – Value of
Debt
Equity Value = $2,700 - $900 million
= $1,800
Value per share on 900 million shares = $1,800/900 =
$2.00
E1.3 Buy or Sell?
Value = $850 + $675
9
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
, SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step hen ()! @(U (# (~()!@*Y )(# (* @(U *~(* (@ (~*# U!(@ &#
= $1,525 million
Value per share = $1,525/25 =
$61
Market price = $45
Therefore, BUY!
Applications
E1.4.Finding Information on the Internet: Dell Inc., General
Motors, and Ford
This is an exercise in discovery. The links on the book’s web
site
will help with the search.
E1.5.Enterprise Market Value: General Mills and Hewlett-Packard
(a) General Mills
Market value of the equity = $36.50 $23,535,2
644.8 million
million shares
Book value = (short-term and
of total 6,885.1
long-
term) debt =
Enterprise value $30,420.3
million
SOLUTI ONS T O EXERCISES AND CASES For FINAN CIAL STATEMENT A NALYSIS AND SECU RITY VALUATI ON Step!!()@ (@ )@I @!)(!@_+~_ )@ )@~ @~* @I@ @i2-22_2 `0he n H. Pe nma n Fifth Edition
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