Question

In: Finance

According to the financial statements for Global Telecom Inc., the firm has total assets valued at...

According to the financial statements for Global Telecom Inc., the firm has total assets valued at $320 million and total liabilities of $200 million. Last year, the company had a total after tax earnings of $12million. Company records indicate that the firm has issued 2 million shares of stock and it has a current market value of $65 a share.

  1. Based on the market to book ratio of the company, will you recommend buying the shares? Why? (8 points)
  2. Calculate one more ratio from the information given and explain how you will use the information. (6 points)
  3. The firm is in fact one of the first movers in the 5G business. Will your answer to a) change given this new piece of information? Explain the potential pitfall of using the market to book ratio in this situation. (6 points)

Solutions

Expert Solution

a. Global Telecom Inc.
Total assets = 320 mln.
TotalLiabilities= 200 mln.
so, Book value of equity= 320-200= 120 mln.
Market to book ratio=Market Value of Equity/Book Value of equity
ie.(2 mln*$ 65)/120=
1.08
Will you recommend buying the shares----YES
Market just adequately reflects the book value of equity & the company seems to perform well , in the eyes of the investor
b. One more ratio can be
Price/Earnings Ratio= Market price per share/Earnings per share
ie. 65/(12 mln./2 mln.)
65/(12/2)=
10.833
Market price is more than 10 times the Earnings per share , indicating investors' confidence about the company.
c. 5G is relatively new to the tech-industry
so, the mood & receptivity of the market needs to be assessed before just the market-to-book ratio
As global's mkt-to-book is just over 1, it needs to be waited & seen how the advanced technology recieves , acceptance & instills confidence in the minds of the potential investors.
so, that is the pitfall of this ratio---that it cannot be applied to all businesses , alike.

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