Multiple Choice
In the context of inventory costing and asset impairment, the recoverability test compares:
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5. Inventory
Financial Statement Effects of Inventory Costing Methods
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If Chester Corporation's current market capitalization is \$500 million and its stock price falls by 10%, what would the new market capitalization be, assuming the number of shares outstanding remains unchanged?
A
$500 million
B
$400 million
C
$550 million
D
$450 million
Verified step by step guidance1
Understand the relationship between market capitalization, stock price, and shares outstanding. Market capitalization is calculated as the product of the stock price and the number of shares outstanding.
Recognize that the number of shares outstanding remains unchanged in this problem. Therefore, any change in the stock price directly affects the market capitalization proportionally.
Calculate the percentage decrease in the stock price. A 10% decrease means the stock price is reduced to 90% of its original value.
Apply the percentage decrease to the current market capitalization. Multiply the current market capitalization (
) by 90% (
) to find the new market capitalization.
Verify the calculation conceptually: If the stock price falls by 10%, the market capitalization should decrease by the same percentage, resulting in a new market capitalization that is 90% of the original value.
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