Chapter 4-2 Home Depot’s common stock closed fiscal 2012 at a price of $86.30 pe
ID: 2728351 • Letter: C
Question
Chapter 4-2
Home Depot’s common stock closed fiscal 2012 at a price of $86.30 per share. There were 1,792 million shares outstanding, At the end of 2012, the book value of Home Depot’s equity was $17,796 million. Suppose the broad stock market falls 10% in a year and Home Depot’s stock price falls by 20%.
Calculate the market value added, if the stock market were unchanged and Home Depot’s stock fell by 20%. (Enter your answer in millions. Round intermediate calculations and final answer to the nearest whole number.)
Home Depot’s common stock closed fiscal 2012 at a price of $86.30 per share. There were 1,792 million shares outstanding, At the end of 2012, the book value of Home Depot’s equity was $17,796 million. Suppose the broad stock market falls 10% in a year and Home Depot’s stock price falls by 20%.
Explanation / Answer
Part A)
Market value of company is price per share times no. of shares outstanding. Therefore, as there is a reduction in stock price, market value of the firm will also fall. Therefore, correct option would be Fall.
Part B)
Yes. We can see because of market related factor, the stock should fell only by 10%. But it actually fell by 20%. That means 10% of fall is because of some nonsystematic factors.
Part C)
Current market value =price x no. of shares
= 86.30 x1792 million
= 154649.60 million
Price after 20% reduction = 86.30 x (1-0.20)
= 69.04
Market value after price reduction = 69.04 x 1792 million
= 123,719.68 million
Market value added = change in market values
= 154,649.60 million – 123,719.68 million
= 30,929.92 million
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