# Class 503

Only available on StudyMode
• Published : September 6, 2010

Text Preview
The average stock prices for each of the four years shown in Exhibit 1 were as follows:
1998111/4 = 27.75
1999163/4 = 40.75
2000281/2 = 140.5
200191/2 = 45.5
a. compute the price/earnings ratio for each year. That is, take the stock price shown above and divide by net income per common stock-dilution from exhibit 1. 2001 (3,417)/\$ 0.27 = 12,655.5
2000 (3,379)/\$0 .55 = 6,143.63
1999 (3,282)/\$ 0.31 = 10,587.09
1998 (3,180)/\$ 0.24 = 13,250.00
b. Why do you think P/E has changed from its 2000 to its 2001 level? ( Earnings per share in Chapt. 2)
The P/E has changed from 2000 at 6,143.63 to 2001 at 12,655.50 because the net income per common stock-dilution has dropped in price. In 2000 it was \$0.55 per common stock to \$0.27 in 2001. The price dropped \$0.28 over a year period. Also there is a drastic change the average stock prices for 2000 to 2001. The stocks were 281/2 in 2000 to 91/2 in 2001, this causing a huge decrease in value. 7. The book values per share for the same four years discussed in the preceding question were: a.Compute the ratio of price to book value for each year.

P/B = Share Price / Book Value per Share

Share PriceBook Value per Share
1998 \$1.18\$ 0.24/\$1.18=\$0.20
1999 \$ 1.55\$ 0.31/\$1.55=\$0.20
2000 \$2.29\$0 .55/\$2.29=\$0.24
2001 \$ 3.26\$ 0.27/\$3.26=\$0.08

b.Is there any dramatic shift in the ratio worthy of note?
Yes, the book value per share was at its highest in 2000 at \$0.24 and drastically dropped in 2001 at \$0.08 book value per share. The lower the book value per share is, the better the value. This is demonstrated in the previous question.