Chadwick, Inc., has 125,000 shares of stock outstanding, sales of $7.2 million, net income of $600,000, a price-earnings ratio of 22, and a book value per share of $36.30. What is the market-
To-book ratio?
A) 1.87
B) 2.43
C) 2.91
D) 3.18
E) 3.27

Question

Quizplus · Accepted Answer

Market value of equity = Price per share * Number of shares = P * 125,000

Earnings per share (EPS) = Net income / Number of shares = $600,000 / 125,000 = $4.8 per share

Market price per share = P = P/E ratio * EPS = 22 * $4.8 = $105.6 per share

Market-to-book ratio = Market value of equity / Book value of equity per share
= (P * 125,000) / $36.30 = $13,200,000 / $36.30 = 363,811.79...

Rounded to two decimal places, the market-to-book ratio is 363,811.79 / 125,000 = 2.91. Therefore, the best choice is C.