Question

The balance sheet for a firm shows a book value of stockholder’s equity (book value per...

The balance sheet for a firm shows a book value of stockholder’s equity (book value per share * total shares outstanding) of $23,500,000. Furthermore, its income statement for the year just ended has net income of $500,000, which is $0.25 per share of common stock outstanding. The price-earnings ratio for firms similar to it is 20.

1. What price would you expect this firm’s shares to sell for?

2. What is the book value per share for it’s shares?

Your submission must include and indicate clearly which EQUATIONS from the textbook that you have used, and must show steps in details that lead to your answers.

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Homework Answers

Answer #1

Stockholder's equity = $23,500,000

Net income = $500,000

Earnings per share (EPS) = $0.25

P/E ratio = 20

1.

P/E RATIO = (MARKET PRICE PER SHARE / EPS)

20 = (MARKET PRICE PER SHARE / 0.25)

MARKET PRICE PER SHARE = 20 * 0.25

MARKET PRICE PER SHARE = $5

Therefore, the firm's share should sell at $5.

2.

EPS = (Net income / Total shares outstanding)

0.25 = (500,000 / Total shares outstanding)

Total shares outstanding = (500,000 / 0.25)

Total shares outstanding = 2,000,000 shares

Stockholder's equity = Book value per share * Total shares outstanding

23,500,000 = Book value per share * 2,000,000

Book value per share = (23,500,000 / 2,000,000)

Book value per share = $11.75

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