Principles of Managerial Finance

346 PART 2 Important Financial Concepts

LG5

LG5

c. Upon further analysis, you find that the growth rate in FCF beyond 2007 will

be 3% rather than 2%. What effect would this finding have on your

responses in parts aand b?

7–18 Book and liquidation value The balance sheet for Gallinas Industries is as

follows.

Additional information with respect to the firm is available:

(1) Preferred stock can be liquidated at book value.

(2) Accounts receivable and inventories can be liquidated at 90% of book value.

(3) The firm has 10,000 shares of common stock outstanding.

(4) All interest and dividends are currently paid up.

(5) Land and buildings can be liquidated at 130% of book value.

(6) Machinery and equipment can be liquidated at 70% of book value.

(7) Cash and marketable securities can be liquidated at book value.

Given this information, answer the following:

a. What is Gallinas Industries’ book value per share?

b. What is its liquidation value per share?

c. Compare, contrast, and discuss the values found in parts aand b.

7–19 Valuation with price/earnings multiples For each of the firms shown in the fol-

lowing table, use the data given to estimate their common stock value employing

price/earnings (P/E) multiples.

Firm Expected EPS Price/earnings multiple

A $3.00 6.2

B 4.50 10.0

C 1.80 12.6

D 2.40 8.9

E 5.10 15.0

Gallinas Industries

Balance Sheet

December 31

Assets Liabilities and Stockholders’ Equity

Cash $ 40,000 Accounts payable $100,000

Marketable securities 60,000 Notes payable 30,000

Accounts receivable 120,000 Accrued wages  (^3)  (^0) , (^0)  (^0)  (^0) 
Inventories  (^1)  (^6)  (^0) , (^0)  (^0)  (^0)  Total current liabilities $ (^1)  (^6)  (^0) , (^0)  (^0)  (^0) 
Total current assets $ (^3)  (^8)  (^0) , (^0)  (^0)  (^0)  Long-term debt $ (^1)  (^8)  (^0) , (^0)  (^0)  (^0) 
Land and buildings (net) $150,000 Preferred stock $ 80,000
Machinery and equipment  (^2)  (^5)  (^0) , (^0)  (^0)  (^0)  Common stock (10,000 shares)  (^3)  (^6)  (^0) , (^0)  (^0)  (^0) 
Total fixed assets (net) $ (^4)  (^0)  (^0) , (^0)  (^0)  (^0)  Total liabilities and stockholders’ equity $

7

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Total assets $

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