CMA Study Group

32. Morton Starley Investment Banking is working with the management of Kell Inc. in order
to take the company public in an initial public offering. Selected information for the year
just ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity: Par value ($1 per share) 3,000,000
Additional paid-in-capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell's industry are trading at a market to book ratio of 1.5, what is
the estimated value per share of Kell?
a. $13.50.
b. $16.50.
c. $21.50.
d. $27.50.
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Hesham Tarek Ibrahim
Accountant
Giza
Egypt
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Hello again,

I think it's B. Number of shares 3 mln. Total equity 3+24+6mln=33mln. Book value per share is 11. (33/3). 11 times a market to book value raio=16,50. The difference between assets and long term debt may be caused by current liabilities, taxes to be paid etc.

Regards

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Nicolaas Johannes Breman
Consultant
Conquaestor
Assendelft
Netherlands
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Original Message:
Sent: 06-25-2012 07:27 AM
From: Hesham Tarek Ibrahim
Subject: estimated value per share


32. Morton Starley Investment Banking is working with the management of Kell Inc. in order
to take the company public in an initial public offering. Selected information for the year
just ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity: Par value ($1 per share) 3,000,000
Additional paid-in-capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell's industry are trading at a market to book ratio of 1.5, what is
the estimated value per share of Kell?
a. $13.50.
b. $16.50.
c. $21.50.
d. $27.50.
-------------------------------------------
Hesham Tarek Ibrahim
Accountant
Giza
Egypt
-------------------------------------------

Answer: B - $16.50

 

Common Equity:  (3,000,000 + 24,000,000 + 6,000,000) = 33,000,000 divide by 3,000,000 shares = $11 per share.  You can find the number of shares by looking at the par value, which is $1 per share, so $1 times some number is $3,000,000, so it must be 3,000,000 shares.

 

Answer:  $11.00 x 1.5 = $16.50

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Patricia Abels CPA
Academic
The University of Findlay
Findlay OH
United States
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Original Message:
Sent: 06-25-2012 07:27 AM
From: Hesham Tarek Ibrahim
Subject: estimated value per share


32. Morton Starley Investment Banking is working with the management of Kell Inc. in order
to take the company public in an initial public offering. Selected information for the year
just ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity: Par value ($1 per share) 3,000,000
Additional paid-in-capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell's industry are trading at a market to book ratio of 1.5, what is
the estimated value per share of Kell?
a. $13.50.
b. $16.50.
c. $21.50.
d. $27.50.
-------------------------------------------
Hesham Tarek Ibrahim
Accountant
Giza
Egypt
-------------------------------------------

Book value of share = (3M+24M+6 )/3M=$11/-
Estimated market value =11*1.5=$16.5/-

Thank you

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Rajasree Ramanunny
Accountant
Sakamkam
Fujairah
United Arab Emirates
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Original Message:
Sent: 06-25-2012 07:27 AM
From: Hesham Tarek Ibrahim
Subject: estimated value per share


32. Morton Starley Investment Banking is working with the management of Kell Inc. in order
to take the company public in an initial public offering. Selected information for the year
just ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity: Par value ($1 per share) 3,000,000
Additional paid-in-capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell's industry are trading at a market to book ratio of 1.5, what is
the estimated value per share of Kell?
a. $13.50.
b. $16.50.
c. $21.50.
d. $27.50.
-------------------------------------------
Hesham Tarek Ibrahim
Accountant
Giza
Egypt
-------------------------------------------