Question

Edelman Engines has $11 billion in total assets. Its balance sheet shows $1.1 billion in current liabilities, $7.7 billion in long-term debt, and $2.2 billion in common equity. It has 900 million shares of common stock outstanding, and its stock price is $25 per share. What is Edelman's market/book ratio? Round your answer to two decimal places.

Answer 1

Answer:

10.23x

Explanation:

Market/Book Ratio = Stock Price /  Net Book Value per Share

Stock Price = $25 per share

Net Book Value per Share = Net Book Value / shares of common stock outstanding

Shares of common stock outstanding = 900 million shares

where;

Total Assets = $11 billion

Total Liabilities = Current Liabilities + Long-Term Liabilities

Total Liabilities = $1.1 billion + $7.7 billion

Total Liabilities = $8.8 billion

Hence;

Net Book Value = Total Assets - Total Liabilities

Net Book Value = $11 billion - $8.8 billion

Net Book Value = $2.2 billion

Therefore;

Net Book Value per Share = Net Book Value / shares of common stock outstanding

Net Book Value per Share = $2.2 billion / 900 million shares

Net Book Value per Share = $2,200,000,000 / 900,000,000 shares

Net Book Value per Share = $2.44 per share

So;

Market/Book Ratio = Stock Price /  Net Book Value per Share

Market/Book Ratio = $25 per share / $2.44 per share

Market/Book Ratio = 10.23x

It means that Stock is over valued and it has performed well because Market/Book Ratio is greater than 1. So the Stock price is set at higher price in relation to Edelman Engines' Net Book Value, so its Market/Book Ratio is 10.23x.