Question

Based on the corporate valuation model, Morgan Inc.'s total corporate value is $200 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?

a.
$4.00
b.
$3.88
c.
$3.36
d.
$4.12
e.
$3.80

Answer 1

To estimate Morgan Inc.'s stock price per share, subtract the total liabilities from the corporate value to find the equity available to common shareholders, and then divide by the number of shares outstanding. The calculated price per share is $4.00.

Step-by-step explanation:

The question is asking for Morgan Inc.'s stock price per share based on the information given using the corporate valuation model. To find this, we need to subtract the company's liabilities from its total corporate value to find the value available to equity shareholders. The total corporate value of Morgan Inc. is given as $200 million. The liabilities include $90 million of notes payable, $30 million of long-term debt, and $40 million of preferred stock. The value of equity for common stockholders equals the total corporate value minus these liabilities.

We calculate the value of equity for common shareholders as follows:

Total liabilities (notes payable + long-term debt + preferred stock) = $90 million + $30 million + $40 million = $160 million

Price per share = Value for common equity / Number of common shares outstanding = $40 million / 10 million shares = $4.00

Therefore, the best estimate of the stock's price per share is $4.00.