1.A company has a share price of $24.50 and 118 million shares outstanding. Its

Question

1.A company has a share price of $24.50 and 118 million shares outstanding. Its book equity is $688 million, its book debt-equity ratio is 3.2, and it has cash of $800 million.

How much would it cost to take over this business assuming you pay its enterprise value?

2.In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $25 million, but the gross margin increased from 2.3% to 3.4% between those years, by what amount was the cost of sales reduced?

3.The Stock market (as measured by the S&P 500 index) declined by 2.6% in the first week of February, 2009. It declined by 8.8% in the second week of February, 2009, and lost 4.8% in the third week of February, 2009. The market gained 5.2% in the last week of February, 2009. Using the weekly market returns, calculate and choose the correct monthly market return for February, 2009.

Explanation / Answer

1. Enterprise value = market value of equity + market value of debt - cash = 24.50*118 + 688*3.2 - 800 = 4292.6 million

2. Increase in gross margin = 3.4%-2.3% = 1.1%

So decrease in cost of sales = increase in gross margin * sales = 1.1%*25 = 0.275 million = 275,000

3. Monthly market return = [(1+week 1 market return) * (1+week 2 market return) * (1+week 3 market return) * (1+week 4 market return)] - 1 = (1-2.6%)*(1-8.8%)*(1-4.8%)*(1+5.2%) = -11.0%, i.e. a decline of 11.0%

Hope this helped ! Let me know in case of any queries.

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