Question

2 Question (30%) | Using the chop-shop approach, assign a value for the Calvert Corporation, where its common stock is currently trading at a total market price of S5 million. For Calvert, the account- ing data set forth two business segments: auto sales and auto specialties. Data for the firm's two segments are as follows SEGMENT SALES ($000) $3,000 SEGMENT ASSETS ($000) $1,000 3,000 $4,000 SEGMENT NCOME (s000) $150 500 $650 BUSINESSs SEGMENT Auto sales Auto specialties Total 2,500 $5,500 Industry data for "pure-play" firms have been compiled and are summarized as follows: CAPITALIZATION CAPITALIZATION ASSETS CAPITALIZATIONI OPERATING INCOME BUSINESS SEGMENT Auto sales Auto specialties SALES 1.40 .80 3.20 18.00 .90 8.00 Required: a. Compute market value of each business segments and market value o whole company. b. Comment you computation and make appropriate recommendation about corporate restructuring

Answer 1

Solution:

We have given the sales number and market capitalization/ sales ratio, so we can calculate the market cap by multiplying the sales with market capitalization/ sales ratio.

Similarly based on the assets and income we can find the market capital of these two given business segment- Auto sales and auto specialties.

Part A ) The market capitalization is calculated below.

Note: All numbers are in 000s

2 Business Segment Sales 3 Auto Sales 4 Auto specialities 5 Total Asset Income 3,000 2,500 5,500 1,000 3,000 4,000 150 500 650 8 Business Segment Capitalization/Sales Capitalization/Asset Capitalization/Income 9 Auto Sales 10 Auto specialities 1.40 3.20 18.00 0.80 0.90 8.00 12 13 Business Segment Capitalization 14 Auto Sales 15 (Formula) 16 Auto specialities 17 (Formula 18 Total Market Value 19 Formula 20 21 Capitalization Capitalization 4,200.00 B9"ВЗ 2,000.00 B10*B4 6,200.00 -B16+B14 3,200.00 -C9 C3 2,700.00 -C10 C4 5,900.00 -C16+C14 2,700.00 4,000.00 -D10 D4 6,700.00 D16+D14

Part B ) We can see that if we go by sales then Auto sales contributes 4200 and specialties 2000. Similarly if we see the market cap due to assets then 3200 and 2700 for these two respectively. While if we see the income then Auto specialties contributes 4000 and auto sales 2700.

So we can see that Auto sales contributes more in 2 cases so the company should focus on this segment.