Question

Suppose you are the Chief Financial Officer of a company that recently decided to enter the...

Suppose you are the Chief Financial Officer of a company that recently decided to enter the stock market. After a month, the stock has a P/B ratio of 0.8. The company has the following book values: 500 million in equity, 200 million in debt and 50 in excess cash. Right now, it has 3 million stocks in circulation. Find the market value of the company (enterprise value).

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Answer #1

Book Value per share = Book Value of Equity / Number of Shares Outstanding
Book Value per share = $500 million / 3 million
Book Value per share = $166.6667

P/B Ratio = Market Price per share / Book Value per share
0.80 = Market Price per share / $166.6667
Market Price per share = $133.3334

Market Value of Equity = Market Price per share * Number of Shares Outstanding
Market Value of Equity = $133.3334 * 3 million
Market Value of Equity = $400 million

Enterprise Value = Market Value of Debt + Market Value of Equity - Excess Cash
Enterprise Value = $200 million + $400 million - $50 million
Enterprise Value = $550 million

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