Question

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a firm has total assets of 25 million TL. Its current assets is 10 million TL...

a firm has total assets of 25 million TL. Its current assets is 10 million TL and fixed assets (machinery, real estate etc) is 15 million TL. This firm’s financial leverage is %45. Firm has 1 500 000 total outstanding shares with 900 000 shares trading at the stock market and one share sells 10 TL in the stock market. What is the firm’s Price/Book ratio( PD/DD)? Calculate the expected stock price and market cap if the average Price/Book ratio (PD/DD) of the comparable firms is 1,2. Would you invest in this stock?

but that is all the information given in the question

Expert Solution

(A) Price/Book ratio = Share Price/ Book Value per Share

Total Book Value = Total assets−Total liabilities

= 25,000,000 TL (Because Total liabilities is 0)

Book Value per Share = (25,000,000/ 1,500,000) TL

= 50/3 TL

So Price/Book ratio = 10/ (50/3)

Price/Book ratio = 3/5 = 0.6

(B) If Price/Book ratio = 1.2 = 6/5

Also Price/Book ratio = Share Price/ Book Value per Share

So 6/5 = Share Price/ (50/3)

Share Price = 20 TL

Market Cap = Share Price * Total number of outstanding shares

= 20 * 1,500,000 TL

Market Cap = 30,000,000 TL

(C)

It is advisable to invest in the stock if its P/B ratio is 0.6. This is because this shows that the company’s is undervalued as its book value is more than its market value. It means that the company has a potential to take its current share price to its book value per share.

While It is not advisable to invest in the stock if its P/B ratio is 1.2. This is because this shows that the company’s is overvalued as its book value is less than its market value. It means that the current share price of the company would drop down to the book value per share mark.

jeff jeffy answered 1 year ago

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