Alex Sharpe's Portfolio

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SOLUTIONS TO
EXERCISES AND CASES

For

FINANCIAL STATEMENT ANALYSIS AND SECURITY VALUATION

Stephen H. Penman

Fifth Edition

CHAPTER ONE

Introduction to Investing and Valuation

Exercises
Drill Exercises
E1.1. Calculating Enterprise Value This exercise tests the understanding of the basic value relation: Enterprise Value = Value of Debt + Value of Equity Enterprise Value = \$600 + \$1,200 million = \$1,800 million (Enterprise value is also referred to as the value of the firm, and sometimes as the value of the operations.)
E1.2. Calculating Value Per Share Rearranging the value relations, Equity Value = Enterprise Value – Value of Debt Equity Value = \$2,700 - \$900 million = \$1,800 Value per share on 900 million shares = \$1,800/900 = \$2.00
E1.3 Buy or Sell? Value = \$850 + \$675 = \$1,525 million Value per share = \$1,525/25 = \$61 Market price = \$45 Therefore, BUY!

Applications
E1.4. Finding Information on the Internet: Dell Inc., General Motors, and Ford This is an exercise in discovery. The links on the book’s web site will help with the search.

E1.5. Enterprise Market Value: General Mills and Hewlett-Packard

a) General Mills
| | |
|Market value of the equity = \$36.50 ( 644.8 million shares = |\$23,535,2 million |
|Book value of total (short-term and long-term) debt = | 6,885.1 |
|Enterprise value |\$30,420.3 million |

Note three points: i) Total market value of equity = Price per share ( Shares…...

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