Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40 percent, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws.
A) 0.47
B) 1.67
C) 8.00
D) 10.00

Question

Quizplus · Accepted Answer

First, calculate the book value of equity. With a debt ratio of 40%, equity is 60% of total assets. So, equity = 0.60 * $40 million = $24 million. The market value of equity is the stock price times the number of shares, which is $20 * 2 million = $40 million. The market-to-book ratio is the market value of equity divided by the book value of equity, which is $40 million / $24 million = 1.67.

Fancy Paws' Year-End Price on Its Common Stock Is $20