Stocks & Commodities V. 26:1 (45): Q&A by Don Bright

Q&A by Don Bright

NOW IF

Can someone tell me if all the assets of a company were worth $1 million and the total number of shares available for the full amount of the company were 100,000 (each share being $10) and regardless of the revenue, the company (always) returned 10% net on the $ million dollars each year — that is, $100,000 — at what price range would the company’s shares trade the second year? How about the third year?

Now if we take away the company’s assets and say the company leases everything but total revenue was $1 million, with net income $100,000, at what price range should the company’s stock trade? —bluud

What you have presented represents a market capitalization at parity with the company’s book value. Very few stocks have a 1-to-1 price/book ratio. The multiples of the price to book are used to determine which stock is bettervalued than another using fundamental analysis. If you pay off all the bills and sell everything, the amount you’re left with is book value. (CONTINUDED) ...