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.? The​ price/book ratio is

Answer 1

The​ price/book ratio is 2.45

This price/book ratio indicates to shareholders that the company have a greater value than the book value, hence shareholders would buy more shares.

Step-by-step explanation:

In order to calculate the​ price/book ratio we would have to calculate the following formula:

price/book ratio=Market price per share/Equity book value per share

Market price per share=price earnings ratio*earnings per share

Market price per share=$12.25*3

Market price per share=$36.75

Equity book value per share=stockholders equity/shares of common stock outstanding

Equity book value per share=$750,500/$50,000

Equity book value per share=$15.01

Therefore, price/book ratio=$36.75/$15.01

price/book ratio=2.45

The​ price/book ratio is 2.45

This price/book ratio indicates to shareholders that the company have a greater value than the book value, hence shareholders would buy more shares.