In 1980 Massey-Ferguson Ltd, a multinational producer of farm machinery, industrial machinery, and diesel engines, lost $225 million, or $12.79 per share. This capped a three year period during which the firm lost almost half a billion dollars. Massey-Ferguson began fiscal 1981 in default on its $2.5 billion of outstanding debt and many observers were openly speculating that the company would soon be forced to declare bankruptcy. These problems had not escaped notice of the stock market, which at the end of October 1980 priced the company's shares at only $5.50.
a. Calculate the market value of Massey-Ferguson's equity on October 31, 1980.
b. Assuming the market value of Massey-Ferguson's debt equals 70 percent of book value, calculate the market value of the company on October 31, 1980. (The market value of debt is well below the $2.5 billion book value due to the prospect of bankruptcy.
c. Is $5.50 per share the market's estimate of the liquidation value of Massey-Ferguson’s equity at the end of October? Why or why not? If not, why else would an investor buy the company's stock?