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Chapter 2: 2-2DQ (page 46)

What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?

Short Answer

Expert verified

The book’s value of the common stock is the value presented in the balance sheet, and the market value is the value of the company’s shares in the tradable market. The disparity occurs as a result of fluctuations in the company’s earnings.

Step by step solution

01

Difference between the book value per share and the market value per share

Book Value per share (BVPS)

Market Value per share (MVPS)

Books value per share is defined as the net asset value per share of the company on the balance sheet date.

Market value per share is defined as the current price of the single share in the market.

02

Reason of difference between the BVPS and MVPS

The difference between the book value per share and the market value per share arises due to the change in the income earned by the company. The book value per share is fixed, but the market value per share fluctuates. The MVPS of the company increases with the increase in its income and vice-versa.

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Most popular questions from this chapter

Elite Trailer Parks has an operating profit of \(200,000. Interest expense for the year was \)10,000; preferred dividends paid were \(18,750; and common dividends paid were \)30,000. The tax was $61,250. The firm has 20,000 shares of common stock outstanding.

a. Calculate the earnings per share and the common dividends per share for

Elite Trailer Parks.

b. What was the increase in retained earnings for the year?

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)

Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.

a. Compute earnings per share and the P/E ratio for 20X2.

b. Compute earnings per share and the P/E ratio for 20X3.

c. Give a general explanation of why the P/E changed. You might want to

consult the text to explain this surprising result.

Explain how depreciation generates actual cash flows for the company.

The Holtzman Corporation has assets of \(400,000, current liabilities of \)50,000, and long-term liabilities of \(100,000. There is \)40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $22,000 in earnings available to common stockholders and

Holtzman’s stock has a P/E of 18 times earnings per share, what is the current

price of the stock?

c. What is the ratio of market value per share to book value per share?
See all solutions

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