EBK CFIN
5th Edition
ISBN: 9781305888036
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 2, Problem 14PROB
Summary Introduction
Calculation of P/E ratio and M/B ratio. IIS has $35 million of common equity, $14 million of net income, and 7 million shares of common shares outstanding. The market price of the common stock is $8 per share.
The price to earnings ratio (P/E ratio) is the ratio of firm's current market price and earnings per share. It gives an idea about the dollar amount an investor can invest in the firm in order to earn one dollar of that firm's earnings.
Earnings per share (EPS) is the firm's profit earned for each share. It is calculated by dividing the firm's total profit with total number of outstanding shares.
Market to book ratio (M/B ratio) is the ratio which shows the relationship between the book value of the stock in the balance sheet and an actual market price of the stock. It helps to measure how much investors are paying against each dollar of book value of the stock in the balance sheet.
Book value per share is the value which measures the firm's net asset value on a per share basis.
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