Question

# A company's book value per share is \$6.47. What is the company's intrinsic price-to-book ratio (to...

A company's book value per share is \$6.47. What is the company's intrinsic price-to-book ratio (to two decimal places) if the present value of the next five year’s residual earnings is \$1.22 per share and the present value of residual earnings beyond year five is \$5.57 per share?

Intrinsic value of share price = Present value of all cash flows arising from the stock

Present value of all cash flows arising from the stock = Present value of next five year's residual earnings + Present value of residual earnings beyond five years

Intrinsic price = \$1.22 + \$5.57

Intrinsic price = \$6.79

So, Intrinsic price = \$6.79

Where as, Book value per share = \$6.47

Intrinsic price - to - book ratio = \$6.79 / \$6.47

Intrinsic price - to - book ratio = 1.04946 or

Intrinsic price - to - book ratio = 1.05 (rounded off to '2' decimals)

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