Question

Amigo Software, Inc., has total assets of $800,000, current liabilities of $150,000, and long-term liabilities of $120,000. There is $65,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued.

Required:
a. Compute book value (net worth) per share.
b. If there is $48,000 in earnings available to common stockholders and the firm’s stock has a P/E of 20 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? (Round to two places to the right of the decimal point.)

Answer 1

Answer and Explanation:

a. The book value per share is

But before that the net worth is

= Total assets - current liabilities - long term liabilities - preferred stock

= $800,000 - $150,000 - $120,000 - $65,000

=  $465,000

Now the book value per share is

= $465,000 ÷ 30,000 shares

= $15.50

b. The current price of the stock is

= $48,000 ÷ 30,000

= $1.60

Now the market value is

= $1.60 × 20

= $32

c. The ratio of market value per share to book value per share is

= $32 ÷ $15.50

= 2.06