View Question
Q: how to calculate total value of the firm ( Answered ,   1 Comment )
 Question
 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?```
 ```Hi!! 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. Regards. livioflores-ga```
 onix-ga rated this answer: `I find out the answer very helpful.`
 ```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.```