Question

Lancaster bakery has net fixed assets of $329,700, current assets of $87,200, a price-earnings ratio of 12.8, a debt-equity ratio of 0.42, and earnings per share of $1.97. what is the market-to-book ratio if there are 36,000 shares of stock outstanding?

Answer 1

Market to book ratio is the ration of market price per share divided by the book value per share, it can be mathematically expressed as below:

Market to Book Value=$\frac{Market Value Per Share}{Book Value Per Share}$

In this problem the first step is to find Market Value per share

PE Ratio is given by the following formula:

PE Ratio=$\frac{Market Price Per Share }{Earning Per Share}$

12.8=$\frac{Market Price Per Share }{1.97}$

Market Price Per Share=$25.216

We now find Book Value Per Share, Book Value is nothing but the Equity Value of the Organization, In the given problem, we don't have this information, but we have total assets, which amounts to $416900($329700+$87200). Using Debt Ratio we can find book value per share as below:

Lets assume Shareholders Equity is x, Thus total liability will be Total Assets-x

Debt Equity Ratio is given as below:

Debt Equity Ratio=$\frac{Total Liabilities}{Equity}$

0.42=$\frac{416900-x}{x}$

x=$293592

Book Value per share=$293592/36000

Book Value per Share=8.155

Market to book value=25.216/8.15533

Market to book value ratio= 3.09