Question

You are evaluating the firm's financial performance based on the following data.

Balance sheet items:

    Marketable securities=100

    Non-operating long-term assets =200

    Cash=100

    Accounts receivable=1,000

    Inventory=1,000

    Operating long-term assets (net of depreciation) = 13,800

    Accounts payable=880

    Accrued taxes=200

    Short-term debt=120

    Long-term debt=5,000

    (1,000 par value, 5 bonds)

    Equity=10,000

    (10 book value per share, 1,000 shares)

Market values:

Market value of the marketable securities =300

Market value of non-operating long-term assets =220

Market value of short-term debt: 120

Long-term bonds: market value per bond: 1,000

Common stock: market price per share: 12.00

What is the firm's market value of operations?

Answer 1

In this problem the value of firm need to be found out using asset based approach, where total assets are subtracted by total external liabilities. The difference lies in the point that we need to calculate the market value of the firm, not the book value. So, all the book values of balance sheet is to be replaced by market values as given.

Let us list out the TOTAL ASSETS

1 Market value of securities= 300

2 Market value of non operating Long tern assets= 220

3 Cash=100

4 Account receivables=1000

5 inventory=1000

6 Operating long term assets=13800

TOTAL= 16420

EXTERNAL LIABILITIES

1 Account payable=880

2 Accrued taxes=200

3 market value of Short term debts=120

4 market value of long term bonds=1000*5=5000

TOTAL=6200

THEREFORE NET ASSET VALUE USING MARKETING APPROACH WILL BE= TOTAL ASSETS - EXTERNAL LIABILITIES

= 16420-6200

=10220. (Answer)