Question

ABX Corp. has 10 million shares of common stock that are currently selling for $60 per share. These shares were issued three years ago at a price of $25 per share and represent the only shares the firm has issued to date. Total net income earned over the past five years is $225 million. ABX did not pay a dividend during the first year, but paid a $2.50 per share dividend in each of the last two years. What is the market value added, MVA, for ABX?

I understand the to find the MVA I need to subtract the Market value of equity ($60 * 10,000,000) from the Book Value of Equity. However, based on the information I have been given I am struggling how I determine the book value of equity. I am not sure where to start since the the total net income given is for the past 5 years. The dividend share for the last 2 years has been 50 million (25 million per year, correct?) and when the shares were issued it would be ($25 * 10,000,000 = 250,000,000) Do I multiply this by 3 subtract the 50 million in dividends? Do I do anything with the Total Net Income number?

Answer 1

Answer:

Market Capitalization:

Market Capitalization = Total Shares Outstanding × Current Market Price = 10 * $60 = $600 million

Total Common Shareholders' Equity:

Given that the 10 million shares that were issued three years ago at a price of $25 per share were the only shares the firm has issued to date.

Retained earnings = cumulative income - cumulative dividends = 225 - 2.50 * 10 * 2 = 225 - 50 = $175 million

Total Common Shareholders' Equity = Equity issued + Retained Earnings

= 10 * 25 + 175

= 250 + 175

= $425 million

Market Value Added (MVA):

Market Value Added (MVA) = Market Capitalization − Total Common Shareholders' Equity

= 600 - 425

= $175 million

Market Value Added (MVA) = $175 million