Firewall corporation has issued 6 000 000 ordinary shares and the firm’s shares are trading at R7.25 each. The firm’s total assets amount to R50 000 000 and total liabilities to R20 000 000 each. Investment trust companies similar to this firm normally trade at a premium of 30% to net asset value (NAV). Calculate the NAV and determine whether to buy or sell the firm’s share.Select one:a.R6.50 buyb.R6.50 sellc.R5.00 buyd.R5.00 sell
Question
Firewall corporation has issued 6 000 000 ordinary shares and the firm’s shares are trading at R7.25 each. The firm’s total assets amount to R50 000 000 and total liabilities to R20 000 000 each. Investment trust companies similar to this firm normally trade at a premium of 30% to net asset value (NAV). Calculate the NAV and determine whether to buy or sell the firm’s share.Select one:a.R6.50 buyb.R6.50 sellc.R5.00 buyd.R5.00 sell
Solution
First, let's calculate the Net Asset Value (NAV).
The NAV is calculated by subtracting the total liabilities from the total assets and then dividing by the number of shares.
So,
Total Assets = R50 000 000 Total Liabilities = R20 000 000 Number of shares = 6 000 000
NAV = (Total Assets - Total Liabilities) / Number of shares NAV = (R50 000 000 - R20 000 000) / 6 000 000 NAV = R30 000 000 / 6 000 000 NAV = R5.00 per share
Now, let's determine whether to buy or sell the firm’s share.
The firm’s shares are trading at R7.25 each. Investment trust companies similar to this firm normally trade at a premium of 30% to net asset value (NAV).
So, the expected trading price = NAV * (1 + Premium) Expected trading price = R5.00 * (1 + 30%) Expected trading price = R5.00 * 1.30 Expected trading price = R6.50
Since the current trading price (R7.25) is higher than the expected trading price (R6.50), it is advisable to sell the firm's share.
So, the answer is b. R6.50 sell.
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