Question

Chang, Inc.'s balance sheet shows a​ stockholders' equity-book value​ (total common​ equity) of ​$750 comma 500. The​ firm's earnings per share is ​$3.00​, resulting in a​ price/earnings ratio of 12.25X. There are 50 comma 000 shares of common stock outstanding. What is the​ price/book ratio? What does this indicate about how shareholders view​ Chang, Inc.?

Answer 1

Answer:

The​ price/book ratio is 2.45

This price/book ratio indicates that the Chang, Inc company has 2.45 higher market value of the stock than the book value of the equity

Explanation:

For computing the price/book ratio, we have to apply the formula which is shown below:

= Market price of equity ÷ book value of equity

where,  

the market value of equity = firm's earnings per share × price/earnings ratio × number of outstanding common stock shares

= $3.00 × 12.25 × 50,000 shares

= $1,837,500

And, the book value of equity is $750,500

Now put these values to the above formula

So, the answer would be equal to

= $1,837,500 ÷ $750,500

= 2.45

This price/book ratio indicates that the Chang, Inc company has 2.45 higher market value of the stock than the book value of the equity