Question

Using the corporate valuation model, the value of a company's operations is $400 million. The company's balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company has 10 million shares of stock, what is your best estimate for the intrinsic stock price per share?

Answer 1

The best estimate for the intrinsic stock price per share is $20.

Step-by-step explanation:

To estimate the intrinsic stock price per share, we need to calculate the present value of the company's operations and subtract the unrelated short-term investments. First, we add up the long-term debt, preferred stock, and total common equity to get the total capital of the company: $90 million + $30 million + $100 million = $220 million. Then, we subtract the short-term investments unrelated to operations: $220 million - $20 million = $200 million. Finally, we divide the value of the company's operations by the number of shares to get the intrinsic stock price per share: $200 million / 10 million = $20 per share.