Why will a firm that has a significant amount of omitted assets have have a high...

Why will a firm that has a significant amount of omitted assets have have a high price to book ratio compared to a firm with few omitted assets

Solutions

Expert Solution

Answer : -

The price-to-book ratio = Stock price ÷ [ total assets - total liabilities]

The more the omitted assets the lower will be the total assets which will result in high price-to-book ratio as the amount of total assets - total liabilities will be less as compared to companies whose omitted assets are less resulting in high total assets and the amount of total assets - total liabilities will be more resulting in low compared to case 1 price-to-book ratio.

Example, if company has $200,000 total assets and $100,000 total liabilities and stock price is $1,000,000 the price-to-book ratio will be = $1,000,000 ÷ [ $200,000 - $100,000] = $1,000,000 ÷ $100,000 = 10

If the company has less omitted assets, total assets is $250,000 and total liabilities is $100,000 and stock price is $1,000,000 the price-to-book ratio = $1,000,000 ÷ [$250,000 - $100,000] = $1,000,000 ÷ $150,000 = 6.66 price-to-book ratio.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Your firm recently divested some non-core assets and now has a significant amount of excess cash....

Your firm recently divested some non-core assets and now has a significant amount of excess cash. Branda Sim, the CEO, is considering investing in either Singapore Technologies Engineering Limited (“STE”) shares or 10-year Singapore Government Securities (“SGS”) or a combination of both. She knows that you are studying a Finance course, and she is seeking your advice. Based on your research, the following market data was obtained: Information relating to STE Date Share Price ($) Dividends Per Share (Cents) 31-Dec-13...

please give 3-5 examples of a business that would have a significant amount of prepaid assets...

please give 3-5 examples of a business that would have a significant amount of prepaid assets and explain

A firm that pays out high dividends will have a _____ amount of growth and pay...

A firm that pays out high dividends will have a _____ amount of growth and pay out most of its return as _____. low, capital gain low, dividends high, capital gain high, dividends

1.A firm has a significant amount of debt outstanding and its operations hit a rough patch....

1.A firm has a significant amount of debt outstanding and its operations hit a rough patch. If it appears that bankruptcy is imminent, the firm’s management may invest in high-risk projects having a negative NPV because: A.the firm’s equity beta is now negative. B.the firm’s debt beta is now negative. C.corporate income taxes are no longer a concern. D.the firm’s debt holders bear most of the project’s downside risk. 2.Home Builder Supply, a retailer in the home improvement industry, currently...

a) Which assets have a high required stable funding factor? Why? b) Which liabilities have a...

a) Which assets have a high required stable funding factor? Why? b) Which liabilities have a high available stable funding factor? Why? c) Explain the reason for the choice of the numerator and denominator in the Liquidity coverage ratio.

Investors and lenders place significant importance on management's effectiveness in generating a high return on assets...

Investors and lenders place significant importance on management's effectiveness in generating a high return on assets (ROA). Explain how ROA is also important for managers' analysis of its own performance, particularly when ROA is disaggregated

Investors and lenders place significant importance on management's effectiveness in generating a high return on assets...

Maxwell Engineering is an enginering firm. Following are the amount of the assets and liabilities maxwell...

Maxwell Engineering is an enginering firm. Following are the amount of the assets and liabilities maxwell engineering at december 31, the end of the current year, and its revenue and expenses for the year ended on that date. The capital of Mack Maxwell, owner, was $84,950 at January 1, the beginning of the current year, the owner withdrew $50,000 durinng the current year. Accounts payable $13,100 Accounts revievable $52,000 Advertising expense $7,500 CASH $37,200 Fees earned $ 329,250 land $90,000...

A common method to retard rusting is to have a significant amount of a second metallic...

A common method to retard rusting is to have a significant amount of a second metallic element in electrical contact, usually connected by a wire, with the bridge, building, ship, etc. This second metallic element is oxidized in preference to the iron in the building or other structure. Which of these metallic elements are good choices to use on an iron structure as a preferred oxidation site? A. Mg, Au, Zn B. Zn C. Au D. Cu E. Al, Cu...

Choose and describe a business that would have a significant amount of inventory and share a...

Choose and describe a business that would have a significant amount of inventory and share a photo of that business (or company logo). Briefly explain whether you expect the business uses a periodic or perpetual inventory system, and why. If the image is not your own, be sure to cite the source in your description.

Subjects