Question

Market Value Ratios You are considering an investment in Roxie’s Bed & Breakfast Corp. During the last year the firm’s income statement listed an addition to retained earnings of $4.8 million and common stock dividends of $2.2 million. Roxie’s year-end balance sheet shows common stockholders’ equity of $35 million with 10 million shares of common stock outstanding. The common stock’s market price per share was $9.00. What is Roxie’s Bed & Breakfast’s book value per share and earnings per share? Calculate the market-to-book ratio and PE ratio.

Answer 1

Answer:

Book value per share is $3.5, Earnings per share is $0.48, Market-to-book ratio is 2.0x; P/E ratio = 18.75

Explanation:

1. In order to calculate the book value of the shares we divide the total value of the shares by the number of shares which is $35,000,000/10,000,000 shares = $3.5

2. Earnings per share is derived by dividing the total earnings (after subtracting preference dividends, but in this case we have common stock dividend so we do not subtract) by the number of shares outstanding. i.e. $4,800,000 / 10,000,000 shares = $0.48

3. Market to book ratio is derived by dividing the market value of the outstanding shares by its book value. Therefore ($9*10,000,000 shares)/$35,000,000 = 2.0 (written as 2.0x, implying that the market value of the shares of Roxie's Bed & Breakfast Corp. can cover its net assets (or equity) twice.)

4.The Price Earnings ratio is derived by dividing the Price of the shares by the earnings per share.i.e. $9/0.48(derived in 2 above) = 18.75.