# Equity Question

I found the unadjusted answer = 2.25 …can someone explain me for adjusted one… The latest annual report of Waterford Crossing Inc. contains the following data: Common stock \$0.50 par value – Issued (2,000,000 shares) \$1,000,000 Additional paid-in-capital\$10,000,000 Retained earnings \$4,000,000 Treasury stock (500,000 shares)\$5,000,000 Current price per share\$15 The company’s ending inventories based on LIFO are valued at \$500,000 and a footnote to financial statements reports inventories valued using FIFO basis would be \$600,000. The company’s tax rate is 30%. The un-adjusted and adjusted price-to-book values of Waterford Crossing, respectively, are closest to: Unadjusted P/BV … Adjusted P/BV A.\$1.88 … \$1.81 B.\$1.88 … \$1.94 C.\$2.25 … \$2.10 D.\$2.25 … \$2.42

This is wrong. In explanation LIFO reserve is calculated as 6M-5M=1M and adjustment is LIFO Reserve*(1-t)… Actual LIFO reserve = 600K-500k=100K and Adj = 100*0.7

Actually, since FIFO is higher than LIFO, the adjustment to FIFO would increase NI, increase equity through RE, therefore increase BV, therefore reduce P/BV. The second one can be selected based only on these, and there is no need for extra calculus. It must be C.

Further, the question assumes that given values are calculated based on LIFO, and adjusted has to be calculated by adjusting it to FIFO. Secondly, I had understanding the tax adj is done only when there is LIFO liquidation. If there is no liquidation, adj should be = E+LIFO Reserve (and not E+LIFO Res*(1-t))

map1 Wrote: ------------------------------------------------------- > Actually, since FIFO is higher than LIFO, the > adjustment to FIFO would increase NI, increase > equity through RE, therefore increase BV, > therefore reduce P/BV. The second one can be > selected based only on these, and there is no need > for extra calculus. It must be C. But Map, what if the given option were C. 2.25 … \$2.10 D. 2.25 …\$1.98 How would you select C now ? …

For the unadjusted part, BV is equity divided by number of shares. Equity should be all items minus treasury stock (so I’m getting \$15 million on that)…number of shares should be 1.5 million (we don’t count those in treasury, right?). If so, I get BV/share = \$15m/1.5 = \$10, and P/BV \$1.5…I must be missing something.

you forgot to deduct the treasury stock (the value of the treasury stock), remember this is a counter to equity

Isn’t that \$15m? \$1m + \$10m + \$4m = \$15m…what’s wrong with me today?

deduct the 5,000,000 that you needed to buy back the 500,000 shares from the market, the amount is 5,000,000

I’m not following you map1.

Common stock \$0.50 par value – Issued (2,000,000 shares) \$1,000,000 Additional paid-in-capital\$10,000,000 Retained earnings \$4,000,000 Treasury stock (500,000 shares)\$5,000,000 Current price per share\$15 The 1,000,000 is the subscribed capital for the 2,000,000 shares. Value is 1,000,000 Additional paid in capital: is what’s above the subscribed capital for shares:10,000,000 Retained earnings: distributions from the NI:\$4,000,000 TReasury stock: you bought back from the market the 500,000 shares, using an amout of \$5,000,000. This amount reduces your year end value of equity. Value of equity (or book value)=1mil+10mil+4mil-5mil=10mil shares outstanding: 2mil-0.5mil=1.5mil BV=6.67 P/BV=2.25

what would we do without you! In my little head, I assumed if i don’t add the treasury stock cost, it’s like deducting it!!! Now I learned that NOT ADDING is not same as DEDUCTING!!!

Easy to get confused at this time when we jump from question to question, ethics, to economics, to FSA to derivatives.