Learning Goals : By Completing This lecture, you should be able to know

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profitability and market
Lecture 2 Risk And Return - part 1 october 15 (3), lec 2
 = \$221,000 ÷ \$3,597,000 = 6.1 % Indicated that the company earned 6.1 cent on each \$ 1.00 common stockholders’ Asset investment The return on equity (ROE) 6) Return On Equity ( ROE) = Analysts should be concerned if this ratio is too low. Assume that : Earning available for Common Stockholders = \$ 221 , 000 , No. of Shares outstanding = 76,262 , Total assets = \$ 3, 597, 000. common stock equity = \$1,754,000 So : Return On Equity ( ROE) = = \$221,000 ÷ \$1,754 ,000 = 12.6 % INDCATED THAT : During this year the company earned 12.6 cent on each Dollar of Common Stock Equity Market Ratios : Here we consider two widely quoted market ratios, one that focuses on earnings and another that considers book value : 1) Price/Earnings (P/E) RATIO= . Measures the amount that investors are willing to pay for each dollar of a firm’s earnings; the higher the P/E ratio, the greater the investor confidence Market Ratios : 1) Price/Earnings (P/E) RATIO= . So: we need here both the market value ( price ) or selling price of this stock , and earning per share When (Helen Company ) selling its stock at \$ 32.25 , and earning per share = \$ 2.90 So The P / E Ratio will equal = \$ 32.25 ÷ \$ 2.90 = 11,12 Measures the amount that investors are willing to pay for each dollar of a firm’s earnings; the higher the P/E ratio, the greater the investor confidence MARKET/BOOK (M/B) RATIO The market/book (M/B) ratio provides an assessment of how investors view the firm’s performance. It relates the market value of the firm’s shares to its book— strict accounting—value. 2) Market/book (M/B) ratio = Provides an assessment of how investors view the firm’s performance. Firms expected to earn high returns relative to their risk typically sell at higher M/B multiples. Assume that : Common Stock equity = \$1.754.000 and Market price of that share = \$ 32.25 , No. of common stock outstanding = 76, 262 Note That calculate the firm’s M/B ratio, we first need to find the book value per share of common stock: Book value per share of common stock = . = 1.754.000÷ 76.262 = \$ 22.9 Then 2) Market/book (M/B) ratio = = \$ 32.25 ÷ \$ 22.9 = 1.408 Dr /Samira Allam.Download 2.59 Mb.Share with your friends:
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