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Chapter 2: 2DQ (page 46)

What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?

Short Answer

Expert verified

The book鈥檚 value of the common stock is the value presented in the balance sheet, and the market value is the value of the company鈥檚 shares in the tradable market. The disparity occurs as a result of fluctuations in the company鈥檚 earnings.

Step by step solution

01

Difference between the book value per share and the market value per share

Book Value per share (BVPS)

Market Value per share (MVPS)

Books value per share is defined as the net asset value per share of the company on the balance sheet date.

Market value per share is defined as the current price of the single share in the market.

02

Reason of difference between the BVPS and MVPS

The difference between the book value per share and the market value per share arises due to the change in the income earned by the company. The book value per share is fixed, but the market value per share fluctuates. The MVPS of the company increases with the increase in its income and vice-versa.

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Most popular questions from this chapter

Nova Electrics anticipates cash flow from operating activities of \(6 million in 20X1. It will need to spend \)1.2 million on capital investments to remain

competitive within the industry. Common stock dividends are projected at

\(.4 million and preferred stock dividends at \).55 million.

a. What is the firm鈥檚 projected free cash flow for the year 20X1?

b. What does the concept of free cash flow represent?

What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

The Denver Corporation has forecast the following sales for the first seven months of the year:

January

\(15,000

May

\)15,000

February

17,000

June

21,000

March

19,000

July

23,000

April

25,000

Monthly material purchases are set equal to 40 percent of forecast sales for the next month. Of the total material costs, 50 percent are paid in the month of purchase and 50 percent in the following month. Labor costs will run \(4,500 per month, and fixed overhead is \)4,500 per month. Interest payments on the debt will be $3,500 for both March and June. Finally, the Denver salesforce will receive a 3.00 percent commission on total sales for the first six months of the year, to be paid on June 30.

Prepare a monthly summary of cash payments for the six-month period from January through June. (Note: Compute prior December purchases to help get total material payments for January.)

Sprint Shoes Inc. had a beginning inventory of 9,250 units on January 1, 20X1. Here were the costs associated with the inventory:

Material

\(15.00 per unit

Labor

8.00 per unit

Overhead

7.10 per unit

During 20X1, the firm produced 43,000 units with the following costs:

Material

\)17.50 per unit

Labor

8.80 per unit

Overhead

10.30 per unit

Sales for the year were 47,350 units at $44.60 each. Sprint Shoes uses LIFO accounting. What was the gross profit? What was the value of ending inventory?

Dodge Ball Bearings had sales of 15,000 units at $45 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 20 percent price decrease (due to a price reduction by a competitor). Returned merchandise will represent 8 percent of total sales. What is your net dollar sales projection for this year?
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