Question

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 SS million. For Calvert, the account- ing data set forth rwo business segments: auto sales and auto specialties. Data for the firm's two segments are as follows BUSINESS SEGMENT Auto sales Auto specialties Total SEGMENT SALES ($000) $3,000 SEGMENT ASSETS ($000) $1,000 3,000 $4,000 SEGMENT NCOME (5000) $150 2,500 SS,500 500 $650 Industry data for "pure-play firms have been compiled and are summarized as follows: BUSINESS SEGMENT Auto sales Auto specialties CAPITALIZATION SALES CAPITALIZATION ASSETS CAPITALIZATION OPERATING INCOME 18.00 8.00 1.40 3.20 .80 .90 Required: a. Compute market value of each business segments and market value of whole company b. Comment you computation and make appropriate recommendation about corporate restructuring.

Answer 1

a. The theoretical values must be averaged to calculate the “chopshop” value of the firm, so we need to calculate the theoretical values

Calculation of the “Theoretical Value” for Cavos, Inc., Using Market Capitalization Ratios

VALUE BASED ON MARKET CAPITALIZATION/SALES

Business Segment	Market Capitalization /Sales (A)	Segment Sales (B)	Theoretical Market Value A*B
Auto Sales	1.40	$3000	$4200
Auto Specialties	0.80	$2500	$2000
		Total	$6200

VALUE BASED ON MARKET CAPITALIZATION/ASSETS

Business Segment	Market Capitalization /Assets (A)	Segment Assets (B)	Theoretical Market Value A*B
Auto Sales	3.20	$1000	$3200
Auto Specialties	0.90	$3000	$2700
		Total	$5900

VALUE BASED ON MARKET CAPITALIZATION/INCOME

Business Segment	Market Capitalization /Income (A)	Segment Income (B)	Theoretical Market Value A*B
Auto Sales	18	$150	$2700
Auto Specialties	8	$500	$4000
		Total	$6700

The theoretical values must be averaged to calculate the “chopshop” value of the firm, so the value of firm is equal to

(value based on sales + value based on assets + value based on income)/ 3

= ($6200000+ $5900000+$6700000)/3 =$6,266,667

b) The Calvert Corporation is selling for significantly less than its chop-shop value—$5,000,000 compared with $6,266,667.