Question

ow are selected balance sheet and market data for three shoe companies. ($ ons) Number of shares End of year outstanding stock price End Assets Liabilities (in millions)(per share) Company Year Company May 31,2016 21,396 9438 Dec. 31, 2016 2,394 70 Jan. 28, 2017 1475 1,682 155 43 $55.22 e, Inc. chers, USA, Inc. eres, Inc. $24.58 $32.82 861 Calculate the market capitalization of each company. Calculate the market to book ratio for each company. Comment on differences you observe. F3 Du F7 4 5 6 8 0

Answer 1

Since the name of the comapnies is not visible in the question i am naming them as 1,2 &3 respectively.

Market capitalization of a company means the total value of the company in the market.

Formula of Market Capitalization = Stock price * No of Outstanding share

Company 1 = $55.22 * 1682 millions i.e. $92,880.04 millions.

Company 2 = $24.58 * 155 millions i.e. $3809.9 millions.

Comapny 3 = $32.82 * 43 millions i.e. $1411.26 millions.

b) MARKET TO BOOK RATIO

Market to Book ratio = Market capitalization / Net Book value.

where, Net book value = Total Asset - Total Liabilities

so, we can say Market to book value = Market Capitalization / (Total Asset - Total Liabilities)

Company 1 = $92,880.04 / ($21,396 - $9,138) i.e. 7.58 times

Company 2 = $3809.90 / ($2,394 - $708) i.e. 2.26 times

Comapny 3 = $1,411.26 / ($1,475 - $861) i.e. 2.30 times

C) Comments

We can see that the comapny 1 is having highest market to book ratio, which means that hi shares are trading at much higher price.. The reason for such higher price can be Firms ability to provide good future profit or the market is having too much believe in this form.

Comparing other firms position is around 2.3 times and which is normal. These shares looks stable and good to buy.