Chapter 2: Q24BP (page 52)

The Holtzman Corporation has assets of $400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is $40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $22,000 in earnings available to common stockholders and
Holtzman’s stock has a P/E of 18 times earnings per share, what is the current
price of the stock?
c. What is the ratio of market value per share to book value per share?

Short Answer

Expert verified

a. The book value per share is$12.5.

b. Current price of the stock is $19.8.

c. Ratio of market value per share to book value per share is 1.584.

Step by step solution

Total liability of the company

$\begin{array}{rcl} Total liability & = & Current liability - Long - term liabilities \\ = & $ 50, 000 + $ 100, 000 \\ = & $ 150, 000 \end{array}$

Book value per share of the company

$\begin{array}{rcl} Book Value per share & = & \frac{Total assets - Total liabilities}{No of shares} \\ = & \frac{$ 400, 000 - $ 150, 000}{$ 20, 000} \\ = & 12.5 \end{array}$

EPS of the company

$\begin{array}{rcl} EPS & = & \frac{Earning available from shareholders}{No . of outstanding share} \\ = & \frac{$ 22000}{20, 000} \\ = & $ 1.1 \end{array}$

Current market price of the company

$\begin{array}{rcl} MPS & = & P / E Ratio \times EPS \\ = & 18 \times $ 1.1 \\ = & $ 9.8 \end{array}$

Ratio of market value per share (MPS) to book value per share (BVPS) of the company

$\begin{array}{rcl} Ratio & = & \frac{MPS}{BVPS} \\ = & \frac{$ 19.8}{$ 12.5} \\ = & 1.584 \end{array}$

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Sales	$900,000
Shares outstanding	50,000
Cost of goods sold	400,000
Interest expenses	40,000
Selling and administration expenses	60,000
Depreciation expenses	20,000
Preferred stock dividend	80,000
Taxes	50,000

Selling and administrative expenses	$328,000
Depreciation expenses	195,000
Sales	1,660,000
Interest expenses	129,000
Cost of goods sold	560,000
Taxes	171,000

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

Short Answer

Step by step solution

Total liability of the company

Book value per share of the company

EPS of the company

Current market price of the company

Ratio of market value per share (MPS) to book value per share (BVPS) of the company

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