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XYZ Corporation’s market value-per-share and book value-per-share begin the year at 45 and 25, respectively. During...

XYZ Corporation’s market value-per-share and book value-per-share begin the year at 45 and 25, respectively. During the year it earns 3/share and retains half. Assuming its price per share is unchanged, what is the new ratio of market value-to-book value per share?

A) 45/25

B) 25/45

C) Greater than 45/25

D) Less than 45/25

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Homework Answers

Answer #1

Beginning market to book value per share = 45/25 or 1.8

Earnings per share during the year = 3

Retained earnings per share during the year = 3*0.5 = 1.5

Ending book value per share = Beginning book value per share + Retained earnings per share during the year

= 25+1.5

= 26.5

New ratio of market to book value per share = 45/26.5 or 1.7

Since new ratio of market to book value per share of 1.7(45/26.5) is less than the beginning ratio of 1.8(45/25), the correct option is D.

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