Penmen Ed.4 Ch1

CHAPTER ONE

Introduction to Investing and Valuation

Exercises

Drill Exercises

E1.1. Calculating Enterprise Value

Enterprise Value = $1,800 million

E1.2. Calculating Value Per Share

Equity Value = $1,800

E1.3 Buy or Sell?

Value = $850 + $675

= $1,525 million

Value per share = $1,525/25 = $61

Market price = $45

Therefore, BUY!

Applications

E1.4. Finding Information on the Internet: Dell Computer and General Motors

This is an exercise in discovery. The links on the book’s web site will help with the

search. Here is the link to yahoo finance:

http://finance.yahoo.com

E1.5. Enterprise Market Value: General Mills and Hewlett-Packard

Market value of the equity =

Book value of total (short-term and long-term) debt =

Enterprise value

Note three points:

(i) Total market value of equity = Price per share × Shares outstanding.

(ii) The book value of debt is typically assumed to equal its market value, but

financial statement footnotes give market value of debt to confirm this.

(iii) The book value of equity is not a good indicator of its market value. The price-to-

book ratio for the equity can be calculated from the numbers given:

$20,925/$6,215.8