Question

Here are simplified financial statements of Phone Corporation from a recent year:

INCOME STATEMENT (Figures in millions of dollars)
Net sales	13,900
Cost of goods sold	4,460
Other expenses	4,197
Depreciation	2,758
Earnings before interest and taxes (EBIT)	2,485
Interest expense	725
Income before tax	1,760
Taxes (at 30%)	528
Net income	1,232
Dividends	936

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	97	166
Receivables	2,782	2,650
Inventories	227	278
Other current assets	907	972
Total current assets	4,013	4,066
Net property, plant, and equipment	20,053	19,995
Other long-term assets	4,296	3,850
Total assets	28,362	27,911
Liabilities and shareholders’ equity
Payables	2,644	3,120
Short-term debt	1,459	1,613
Other current liabilities	851	827
Total current liabilities	4,954	5,560
Long-term debt and leases	5,026	5,401
Other long-term liabilities	6,258	6,229
Shareholders’ equity	12,124	10,721
Total liabilities and shareholders’ equity	28,362	27,911

Phone Corp.’s stock price was $92 at the end of the year. There were 213 million shares outstanding.

a.	What was the company’s market capitalization and market value added? (Enter your answers in billions rounded to 2 decimal places.)

Market capitalization	$  billion
Market value added	$  billion

b.	What was its market-to-book ratio? (Round your answer to 2 decimal places.)

Market-to-book ratio

Answer 1

(a)-Company’s market value & market value added

Market capitalization = Number common shares outstanding x Market Price per share

= 213 Million shares x $92 per share

= $19,596.00 Million

Company’s Market Value Added = Market Value of Equity – Book Value of Equity

= $19,596.00 Million - $12,124.00 Million

= $7,472.00 Million

(b)-Market-to-book ratio

Market-to-book ratio = Market Value of Equity / Book Value of Equity

= $19,596.00 Million / $12,124.00 Million

= 1.62 Times