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The balance sheet for Larry Underwood Motors shows a book value of? stockholders' equity? book value per share×total shares? outstanding) of $1,387,000
The balance sheet for Larry Underwood Motors shows a book value of? stockholders' equity? book value per share×total shares? outstanding) of $1,387,000. ? Furthermore, the? firm's income statement for the year just ended has a net income of $592,000?, which is $0.295 per share of common stock outstanding. The? price-earnings ratio for firms similar to Underwood Motors is 21.54.
A. What price would you expect Underwood Motors shares sell for? The market price per share is _______ (Round to the nearest cent)
B. What is the book value per share for Underwood's shares?
Expert Solution
a) Computation of Market Price per Share:
Price-earnings ratio of similar firms = 21.54
Therefore, the Price earnings ratio of Underwood motors would also be in the same range.
Price -Earnings Ratio = Market price / Earnings per share
Therefore, the market price of Underwood motors = Price earnings ratio * Earnings per share = 21.54*$0.295
= $6.35
b) Computation of Book Value per Share of Underwood Motors:
Earnings per share = Net income / Common shares outstanding
Here,
Common shares outstanding = Net income / Earnings per share = $592,000 / $0.295 = 2,006,780 shares
Book value per share of Underwood Motors = Book value of stockholder's equity / Common shares outstanding
= $1,387,000 / 2,006,780 shares
Book value per share of Underwood Motors = $0.69
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