Chapter 4, Problem 1QP

Market Value Added. Here is a simplified balance sheet for Locust Farming:

Locust has 657 million shares outstanding with a market price of $83 a share.

1. a. Calculate the company’s market value added.
2. b. Calculate the market-to-book ratio.
3. c. How much value has the company created for its shareholders?

Summary Introduction

To calculate: The added market value.

Explanation of Solution

Computation of the market value added:

$\begin{array}{c}\text{Market value}=\text{Shares outstanding}\times \text{Market price per share}\\ \text{=\$657 million}\times \text{\$83}\\ \text{=\$54,531 million}\end{array}$

$\begin{array}{c}\text{Market value added}=\text{Market value}-\text{Equity}\\ \text{=\$54,531}-\$17,532\\ =\$36,999\end{array}$

Hence, the market value added is $36.999.

Summary Introduction

To compute: The market to book ratio.

Explanation of Solution

Computation of the market to book ratio:

$\begin{array}{c}\text{Market to book ratio}=\frac{\text{Market value }}{\text{Equity}}\\ =\frac{54,531}{17,532}\\ =3.11\end{array}$

Hence, the market to book ratio is 3.11.

Summary Introduction

To discuss: The value created by the company to their shareholders.

Explanation of Solution

The company has maximized the value of the investment in equity by 311%.