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Chapter 2: 2DQ (page 46)

What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?

Short Answer

Expert verified

The book’s value of the common stock is the value presented in the balance sheet, and the market value is the value of the company’s shares in the tradable market. The disparity occurs as a result of fluctuations in the company’s earnings.

Step by step solution

01

Difference between the book value per share and the market value per share

Book Value per share (BVPS)

Market Value per share (MVPS)

Books value per share is defined as the net asset value per share of the company on the balance sheet date.

Market value per share is defined as the current price of the single share in the market.

02

Reason of difference between the BVPS and MVPS

The difference between the book value per share and the market value per share arises due to the change in the income earned by the company. The book value per share is fixed, but the market value per share fluctuates. The MVPS of the company increases with the increase in its income and vice-versa.

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Most popular questions from this chapter

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

d. Total assets turnover ratio.

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

Perez Corporation has the following financial data for the years 20X1 and 20X2:

20X1

20X2

Sales

\(8,000,000

\)10,000,000

Cost of goods sold

6,000,000

9,000,000

Inventory

800,000

1,000,000

b. Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods sold/Inventory, for each year.

Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows

Sales\( 2790000
Cost of goods sold1790000
Gross profits\) 1000000
Selling and administrative expenses302000
Operating profits\( 698000
Interest Expense54800
Income before tax\) 643200
Taxes 30%192960
Income after tax$ 450240

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity

The Lancaster Corporation’s income statement is given below.

a. What is the times-interest-earned ratio?

Lancaster corporation

Sales

\(246,000

Cost of goods sold

122,000

Gross profit

\)124,000

Fixed charges (other than interest)

27,500

Income before interest and taxes

\(96,500

Interest

21,800

Income before taxes

\)74,700

Taxes (35%)

26,145

Income after taxes

$48,555
See all solutions

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