After determining the expected return on its stock, XYZ ventures decides to sell

Question

After determining the expected return on its stock, XYZ ventures decides to sell the entire corporation with expected earnings estimated to be $8,000,000. With 200,000 shares outstanding and preferred equity at $4,500,000. A. Determine the liquidation value of XYZ ventures. B. Before liquidation, if current stock price of XYZ ventures is $8 per share, and expected benefit is $4.50 per share. Determine the expected return on the stock. A. Determine the liquidation value of XYZ ventures. B. Before liquidation, if current stock price of XYZ ventures is $8 per share, and expected benefit is $4.50 per share. Determine the expected return on the stock.

Explanation / Answer

Part a)

Liquidation value = expected earnings + preferred equity

                                   = 8,000,000 + 4,500,000

                                   = 12,500,000

Part b)

Value of firm based on common stock:

Total value per share = 8+4.50 = 12.50

Total value of firm = 200,000 x 12.50

                                     = 2,500,000

Expected return = expected benefit/ price

                                = 4.50 /8

                                = 56.25%

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