Question

In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE's a. Market capitalization? b. Market-to-book ratio? c. Enterprise value?

Answer 1

Answer and Explanation:

1. The computation of Market capitalization is shown below:-

Market Capitalization in 2009 = Market Price × Outstanding Shares

= 10.5 × $105

= $1,102.5 billion

Market Capitalization in 2012 = Market Price × Outstanding Shares

= $17 × $10.6

= $180.2 billion

Changes in Market Capitalization = Market Price × Outstanding Shares

= $1,102.5 billion - $180.2 billion

= $922.3

b. The computation of Market-to-book ratio is shown below:-

Market to Book Ratio in 2009 = Market Value of Firm ÷ Book Value of Firm

= $1,102.5 billion ÷ $105 billion

= 10.5

Market to Book Ratio in 2012 = Market Value of Firm ÷ Book Value of Firm

= $180.2 billion ÷ $116 billion

= 1.55

Changes in Market to Book Ratio = Market to Book Ratio in 2009 - Market to Book Ratio in 2012

= 10.5 - 1.55

= 8.95

c. The computation of enterprise value is shown below:-

Book Debt to Equity Ratio in 2009 = Debt ÷ Book Value of Equity

= $524 ÷ $105

= 4.99

Book Debt to Equity Ratio in 2012 = Debt ÷ Book Value of Equity

= $410 ÷ $116

= 3.53

Changes in Book Debt to Equity Ratio = Book Debt to Equity Ratio in 2012 - Book Debt to Equity Ratio in 2009

= 3.53 - 4.99

= -1.46