Question

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?

Short answer

Answer:

a. The book value per share is$12.5.

b. Current price of the stock is $19.8.

c. Ratio of market value per share to book value per share is 1.584.

Step-by-step solution

Total liability of the company

$$\begin{gathered} Totalliability=Currentliability-Long-termliabilities \\ =\$50,000+\$100,000 \\ =\$150,000 \end{gathered}$$

Book value per share of the company

$$\begin{gathered} BookValuepershare=\frac{Totalassets-Totalliabilities}{Noofshares} \\ =\frac{\$400,000-\$150,000}{\$20,000} \\ =12.5 \end{gathered}$$

EPS of the company

$$\begin{gathered} EPS=\frac{Earningavailablefromshareholders}{No.ofouts\tan dingshare} \\ =\frac{\$22000}{20,000} \\ =\$1.1 \end{gathered}$$

Current market price of the company

$$\begin{gathered} MPS=P/ERatio\times EPS \\ =18\times \$1.1 \\ =\$9.8 \end{gathered}$$

Ratio of market value per share (MPS) to book value per share (BVPS) of the company

$$\begin{gathered} Ratio=\frac{MPS}{BVPS} \\ =\frac{\$19.8}{\$12.5} \\ =1.584 \end{gathered}$$