Question 3 20 points A Why might a firm trade at a pricetobo

Question 3 (20 points) A. Why might a firm trade at a price-to-book ratio (P/B) greater than 1.0? B. If the price-to book value per share is less than one, what does that mean? C. A stock may trade below its book value for several reasons. List some of these factors D. Pick a company from Saudi Stock Market that its stocks has been traded below its book value. Name this company? Why it was traded below its book value? Are stocks trading below their book value a good bet? Explain? E. If a firm is expected to have a profit margin of 8 percent but trades at a price-to sales ratio of 25, what inferences would you make? F. Should a firm that has higher free cash flows have a higher value?

Solution

A. A Firm might trade at a Price-to-book ratio(P/B)greater than 1.0 because a  P/B ratio gretaer than 1.0 indicates that the investors are willing to pay more for the firm than its net assets are worth , It means that the firm has a healthy future profit projections and the investors are willing to pay a premium for that possibility.

B. If the Price-to-book value per share is less than 1 , thna it means , that  firm\'s stock price is selling for less than their assets are actually worth.In other words , it tells two things , i.e.

1. Either the market believes the asset value is overstated,

2. Or the company is earning a very poor or even negative return on its assets.

So this states a negative view about the firm.

C. A stock may trade below its book value for several reasons, Some of these factors are ,

1. It may due to lack of investor confidence in the company\'s future.

2. It  could be belief that the company is adopting aggressive accounting policies.

3. If it is widely believed that the company\'s performance will deteriorate,