Value Corp

question 56

Essay

Value Corp.recently reported earnings of $2 per share and each of their 50,000 shares is currently selling for $20.The firm's book equity is $600,000.An analyst has estimated that the firm's assets could be replaced for $1.8 million and that the Tobin's q for the firm is 1.4.[Note: Tobin's q is the ratio of market value of assets to replacement cost of the assets.] Given this information, answer the following about the firm's market-value ratios:
Calculate the firm's price-to-earnings (P/E) and market-to-book ratios.
If the P/E ratio is said to compare favourably to that of the industry average, speculate on what could account for this fact.
Calculate the firm's market value of assets and comment on the magnitude of their Tobin's q.

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Definitions:

Partial Equity Method

An accounting method used for investments, wherein an investor recognizes its share of investee profits, but only to the extent of dividends received.

Equity Income

Income that an investment generates from dividends on stocks or mutual funds, indicating earnings derived from ownership interests in companies.

Internal Accounting Records

Documents and records kept by a company that detail its financial transactions, assets, liabilities, and equity.

Consolidated Total Expenses

The aggregate expenses of both the parent company and its subsidiaries, as presented in the consolidated financial statement.