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Answer: undervalued
## Explanation **Step 1: Calculate the adjusted asset values** - **Inventories**: Reported value = $15.0 million Market value = 110% × $15.0 million = $16.5 million Adjustment = $16.5 - $15.0 = $1.5 million increase - **Net fixed assets**: Reported value = $25.0 million Market value = 115% × $25.0 million = $28.75 million Adjustment = $28.75 - $25.0 = $3.75 million increase - **Other assets** (Cash, Accounts receivable): Remain at reported values **Step 2: Calculate adjusted total assets** Reported total assets = $50.0 million Add inventory adjustment: +$1.5 million Add fixed assets adjustment: +$3.75 million Adjusted total assets = $50.0 + $1.5 + $3.75 = $55.25 million **Step 3: Calculate adjusted equity value** Since liabilities remain unchanged at $22.5 million: Adjusted equity = Adjusted total assets - Total liabilities Adjusted equity = $55.25 - $22.5 = $32.75 million **Step 4: Calculate adjusted equity value per share** Adjusted equity per share = Adjusted equity ÷ Shares outstanding Adjusted equity per share = $32.75 million ÷ 2.0 million shares = $16.375 per share **Step 5: Compare with current market price** Current market price = $18.00 per share Adjusted equity value per share = $16.375 per share **Step 6: Determine valuation status** Since current market price ($18.00) > adjusted equity value per share ($16.375), the shares are **overvalued** based on the asset-based valuation approach. **Conclusion**: The company's shares are most likely **overvalued** (Option C).
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An analyst gathers the following balance sheet information (in $ millions) for a company:
| Cash | 2.5 |
|---|---|
| Accounts receivable | 7.5 |
| Inventories | 15.0 |
| Net fixed assets | 25.0 |
| Total assets | 50.0 |
| Total liabilities | 22.5 |
| Common shareholders' equity | 27.5 |
| Total liabilities and equity | 50.0 |
The market value of inventories is 110% of reported value and the market value of net fixed assets is 115% of reported value. All other values are as reported. There are 2.0 million shares outstanding and the current share price is $18.00. Using an asset-based valuation approach, the company's shares are most likely.
A
undervalued
B
fairly valued.
C
overvalued.
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