Study Unit 2.3: Per-Share Ratio

Question 1

A corporation is said to have a simple capital structure if the following two conditions apply

Answer 1

1. firm has only common stock

2. firm has no dilutive potential common stock

Question 2

Earnings Per Share calculation

Answer 2

Net Income available to common share holders / Weighted Average common shares outstanding

Question 3

price/EBITDA ratio

Answer 3

Market Price Per share / EBITDA per share

measures how much an investor must spend to “buy” a dollar of EBITDA

Question 4

Disadvantages of EBITDA

Answer 4

Overstates income: EBITDA distorts reality

Neglects working capital requirements

Is not effective for valuation: companies with debt deserve lower valuations compared to their debt-free counterparts.

Question 5

Book value per share

Answer 5

(total shareholder equity - preferred equity) / Number of common shares outstanding

Question 6

limitation of book value per share

Answer 6

is that it is a valuation based solely on the amounts recorded in the books

1. book value does not consider future earnings potential in determining a company’s valuation
2. recorded values of assets on the books are subject to accounting estimates
3. those same assets may be pledged as collateral on a loan. However, a pledge of collateral is not recorded as a liability on the books.

Question 7

price-earnings (P/E) ratio

Answer 7

Market Price / EPS

Growth companies are likely to have high P/E ratios

Question 8

Market-to-book ratio (also called the price-book ratio)

Answer 8

Market Price per share / Book Value Per Share

Question 9

Price-sales ratio

Answer 9

Market Price per share / Sales per share

Analysts who use the price-sales ratio believe that strong sales are the basic ingredient of profits and that sales are the item on the financial statements least subject to manipulation.

Question 10

Earnings yield

Answer 10

rate of return on the purchase price of a share of common stock

Earnings Per share / Market price per share

Question 11

dividend payout ratio

Answer 11

Dividends to common shareholders / income available to common shareholders

Question 12

dividend yield.

Answer 12

Dividend per share / Market price per share

Question 13

Shareholder return

Answer 13

measures the return on a purchase of stock

(ending stock price - Beginning Stock price + Annual Dividend per share) / Beginning Stock Price