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.
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