Chapter 11, Problem 2AA

To determine

Book Value of Share:

It shows the current book value of each share. It comes after subtracting preferred stock from total stockholder’s equity and then dividing it by total number of outstanding shares.

$\text{Book}\text{value}\text{of}\text{share}=\frac{\text{Total}\text{common}\text{stockholder's}\text{equity}}{\text{Total}\text{number}\text{of}\text{outstanding}\text{shares}}$

Price Earnings ratio:

It shows how much a shareholder pays for every $1 of its dividend. It is determined by dividing Price of share by dividend.

$\text{Price-earnings}\text{ratio}=\frac{\text{Market}\text{Value}\text{of}\text{each}\text{Share}}{\text{Earnings}\text{per}\text{share}}$

Earnings per share:

It shows how much a shareholder earns on his one share. It is determined by dividing net income from outstanding shares.

1.

Book value of per share of the common stock.

Explanation of Solution

Solution:

Formula for calculating book value per share is:

$\text{Book}\text{value}\text{of}\text{share}=\frac{\text{Total}\text{common}\text{stockholder's}\text{equity}}{\text{Total}\text{number}\text{of}\text{outstanding}\text{shares}}$

For A. Company:

Given info,

Total common stockholder’s equity is $119,255,000.

Total number of outstanding shares is $5,578,753.

Substituting, $119,255,000 for total common stockholder’s equity and $5,578,753 for total number of outstanding shares in the above formula,

$\begin{array}{c}\text{Book}\text{Value}\text{of}\text{Share}=\frac{\$119,255,000}{\$5,578,753}\\ =\$21.39\end{array}$

Hence, the book value of share is $21.39.

For G. Company:

Given info,

Total common stockholder’s equity is $120,331,000.

Total number of outstanding shares is $687.348.

Substituting, $120,331,000 for total common stockholder’s equity and $687.348 for total number of outstanding shares in the above formula,

$\begin{array}{c}\text{Book}\text{Value}\text{of}\text{Share}=\frac{\$120,331,000}{\$687.348}\\ =\$175.07\end{array}$

Hence, the book value of share is $175.07.

2.

To determine

Earning per share of the common stock.

Explanation of Solution

Solution:

Formula for earnings per share is:

  $\text{Earning}\text{per}\text{share}=\frac{\text{Net}\text{income}}{\text{Outstanding}\text{shares}}$

For A. Company:

Given info,

Net income is $119,355,000.

Total number of outstanding shares is 5,578,753.

Substituting, $119,355,000 for net income and 5,578,753 for total number of outstanding shares in the above formula,

$\begin{array}{c}\text{Earning}\text{per}\text{share}=\frac{\$119,355,000}{5,578,753}\\ =\$21.39\end{array}$

Hence , the earning per share is $21.39.

For G. Company:

Given info,

Net income is $16,348,000.

Total number of outstanding shares is 648.626.

Substituting, $16,348,000 for net income and 648.626 for total number of outstanding shares in the above formula,

$\begin{array}{c}\text{Earning}\text{per}\text{share}=\frac{\$16,348,000}{648.626}\\ =\$23.88\end{array}$

Hence , the earning per share is $23.88.

3.

To determine

To compute: Dividend yield and explain they are income or growth stock.

Explanation of Solution

Solution:

Formula for calculating dividend yield is:

$\text{Dividend}\text{Yield}=\frac{\text{Dividend}\text{per}\text{share}}{\text{Value}\text{of}\text{each}\text{share}}\times 100$

For A. Company:

Given info,

Dividend per share is $1.98.

Value of each share is $107.25.

Substituting, $1.98 for dividend per share and $107.25 for value of each share in the above formula,

  $\begin{array}{c}\text{Dividend}\text{Yield}=\frac{\$1.98}{\$107.25}\times 100\\ =1.85\%\end{array}$

Hence , the dividend yield is 1.85%.

For G. Company:

Given info,

Dividend per share is $0.

Value of each share is $775.10.

Substituting, $0 for dividend per share and $775.10 for value of each share in the above formula,

$\begin{array}{c}\text{Dividend}\text{Yield}=\frac{\$0}{\$775.10}\times 100\\ =0\%\end{array}$

Hence , the dividend yield is 0%.

They both are growth stock as A. Company gives low return and G. Company give no return at all. It means they are reinvesting the money.

Hence, both are growth stock.

4.

To determine

To compute: Price earnings ratio and identify which one is undervalued.

Explanation of Solution

It shows the amount paid by the investor for every $1 of dividend.

Formula for calculating price earnings ratio:

$\text{Price-earnings}\text{ratio}=\frac{\text{Market}\text{Value}\text{of}\text{each}\text{Share}}{\text{Earnings}\text{per}\text{share}}$

5.

To determine

To compute: Price earnings ratio and explain them.

Explanation of Solution

It shows the amount paid by the investor for every $1 of dividend.

Formula for calculating price earnings ratio:

$\text{Price-earnings}\text{ratio}=\frac{\text{Market}\text{Value}\text{of}\text{each}\text{Share}}{\text{Earnings}\text{per}\text{share}}$

For A. Company:

Given info,

Earnings per share are $9.28.

Market value per share is $107.

Substitute, $9.28 for earnings per share and $107 for market value per share in the above formula,

$\begin{array}{c}\text{Price-earnings}\text{ratio}=\frac{\$107}{\$9.28}\\ =11.53\end{array}$

Hence, price earnings ratio is 11.53

For G. Company:

Given info,

Earnings per share are $23.88.

Market value per share is $775.10.

Substitute, $23.88 for earnings per share and $775.10 for market value per share in the above formula,

$\begin{array}{c}\text{Price-earnings}\text{ratio}=\frac{\$775.10}{\$23.88}\\ =32.46\end{array}$

Hence, price earnings ratio is 32.46

It show that that amount paid by the investor of A. Company for every $1 of dividend is $11.53 and amount paid by the investor of G. Company for the payment of $1 dividend is $32.46. It means investor of G. Company is triple the amount of money for same dividend.

Hence, Investor of G. Company is paying triple the amount of money for same dividend as compare to the A. Company.