A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-earnings ratio of 10, and a book value per share of $.50. What is the market-to-book ratio?
A) 1.6
B) 2.4
C) 3.0
D) 3.2
E) 3.6

Question

Quizplus · Accepted Answer

The market-to-book ratio is calculated by dividing the market value per share by the book value per share. First, find the market value per share: the price-earnings (P/E) ratio is 10, and the earnings per share (EPS) is net income divided by the number of shares, which is $800 / 5,000 = $0.16. Therefore, the market value per share is P/E ratio * EPS = 10 * $0.16 = $1.60. The book value per share is given as $0.50. Thus, the market-to-book ratio is $1.60 / $0.50 = 3.2.

A Firm Has 5,000 Shares of Stock Outstanding, Sales of $6,000