3 questions about fin

Important General Instructions for Reporting Numerical Answers:

– Do not round intermediate calculations.

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– Report your answers to the number of decimal places requested.

– Unless otherwise instructed, solve problems in the given units. IE: if given units are in $K, complete your computations in these units and, as applicable, report your answer in these units (without writing “$” or “K”).

– Do not report any numerical answer as a percent. IE: for example, write

0.324 instead of 32.4%.

– Report negative numbers with a leading minus sign, like this (for example):

-23.451

Not like this: (23.451).

– Note that Canvas removes trailing insignificant figures. If you type, for example, 41.350, Canvas will remove the last decimal place and record your answer as 41.35 This is fine because 41.35 = 41.350.

– Assume time is measured in years unless otherwise stated.

KB Homes (KBH) builds and sells single family homes to first-time homebuyers. KBH’s Inventory consists of houses being constructed and completed, for-sale homes. Consider this additional information for the firm:

Shares outstanding: 2,000,000
Price per share $1.00

Latest Balance Sheet

Cash 600,000
Inventory 2,000,000
Other Current Assets 100,000
Net PPE 500,000
Total Assets 3,200,000
Total Current Liabilities 500,000
Long term debt 200,000
Total Liabilities 700,000
Equity (GAAP) 2,500,000

As always for GAAP Balance Sheets, Inventory is measured at cost, not sale price. As an awesome analyst, you estimate that the market value (sale price) of KBH’s Inventory is $4,000,000. You also believe that the rest of KBH’s assets, as reported on the Balance sheet, are roughly equal to thier market values. Round your answers to zero decimal places.

Q1:

What is your estimate for the intrinsic or true value of KBH to owners?

Q2:

What does “Mr. Market” (as Warren Buffet says) believe is the value of KBH’s equity?

Q3:Multiple choice

Based on your analysis, would purchasing shares of KBH probably be a good investment?
Answer yes or no, and provide one reason.

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