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:

Insight Learning

A sudden understanding of how to solve a problem after a period of either inaction or thinking about the problem.

Shaping

A method in behavioral psychology where successive approximations of a desired behavior are reinforced until the exact behavior is achieved.

Token Economy

A behavior modification system that utilizes tokens as a form of reinforcement for desirable behaviors, which can be exchanged for rewards.

Variable Interval Schedule

A reinforcement strategy in operant conditioning where a response is rewarded after an unpredictable amount of time has passed.