A Good Bit of Relatively Simple Arithmetic Is Involved in Some

question 15

Multiple Choice

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students some time to set up the problem and do the arithmetic. We allow for this when assigning problems for a timed test.
Also, students must use a number of definitions to answer some of the questions. To avoid excessive memorization, we provide students with a list of formulas and definitions for use on exams. Problems with * in the topic line are nonalgorithmic.
-Bauer Software's current balance sheet shows total common equity of $5,125,000.The company has 530,000 shares of stock outstanding,and they sell at a price of $27.50 per share.By how much do the firm's market and book values per share differ?

• A)$17.83
• B)$18.72
• C)$19.66
• D)$20.64
• E)$21.67

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Definitions:

Capital Structure

Refers to how a firm finances its overall activities and growth through different sources of funds, such as debt and equity.

M&M Proposition I

A theory stating that, in a perfect market, the value of a firm is unaffected by how it is financed, regardless of the debt-to-equity ratio.

Capital Structure

Refers to the way a corporation finances its assets through a combination of equity, debt, or hybrid securities.

M&M Proposition I

Modigliani and Miller's principle suggesting the irrelevance of financial leverage on a company's valuation in an ideal market.