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Q: how to calculate total value of the firm ( Answered 5 out of 5 stars,   1 Comment )
Subject: how to calculate total value of the firm
Category: Business and Money > Economics
Asked by: onix-ga
List Price: $15.00
Posted: 21 Jun 2005 15:35 PDT
Expires: 21 Jul 2005 15:35 PDT
Question ID: 535651
The firm has:
Debt:10,000 of 8 percent coupon bonds outstanding, 15 years to
maturity, selling for 92 percent of par.  The bonds have a $1000 par
value each and make semi-annual payments.
Common stock:	250,000 shares outstanding selling for $70 per share;
the beta is 1.4.
Preferred stock:	10,000 shares of 6 percent preferred stock
outstanding, selling for $95 per shares.
Market:		8 percent expected market risk premium; 5 percent risk-free rate. 
What is the total value of the firm?
Subject: Re: how to calculate total value of the firm
Answered By: livioflores-ga on 22 Jun 2005 00:13 PDT
Rated:5 out of 5 stars

This is a tricky question, because the statement of the problem gives
us more (actually much more) info than we need to solve it:

The total value of the firm equals the value of its debt plus
preferred plus common.

The market value of equity is usually fairly simple to compute:
? Common Stock = Stock price * Actual Number of shares outstanding
? Preferred stock = Number of shares * Value per share

Market value of Common stocks = 250,000 shares * $70 per share =
                              = $17,500,000

Market value of Preferred Stocks = 10,000 shares * $95 per share =
                                 = $950,000

The market value of debt can usually be estimated by taking the present value
of the expected payments on the debt and discounting back to the present at
the current borrowing rate. But in this case we have the current
market price of the debt:
"10,000 ... bonds outstanding, ..., SELLING FOR 92 PERCENT OF PAR. The
bonds have a $1000 par value each..."
The above means that each bond has a current market value of $920, then:
Market value of Debt = 10,000 bonds * $920 per bond =
                     = $9,200,000

Total Value of the firm = $17,500,000 + $950,000 + $9,200,000 =
                        = $27,650,000

I hope that this helps you. Feel free to request for a clarification
if you need it.

onix-ga rated this answer:5 out of 5 stars
I find out the answer very helpful.

Subject: Re: how to calculate total value of the firm
From: waukon-ga on 22 Jun 2005 01:50 PDT
In the West, and particularly in English-speaking countries,
'good-will' is also factored into the value. Good-will can involve a
brand-name; for a well-known brand-name that sells well, the very
value of that brand-name has value above and beyond the nominal value
of producing the product that bears that trademarked name: this is the
'good-will' value.

Similarly, a firm with an excellent reputation and long relations with
customers has a value above and beyond the actual physical assets of
the firm. This is the good-will value.

Aggregate good-will value can make a company far more valuable than
another with less good-will.

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