1 Smith Inc stock currently sells for 75 per share The firm

1. Smith, Inc. stock currently sells for $75 per share. The firm has total assets of $1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has 10,000 shares of common stock outstanding,

(a) What is the book value of each share of common stock?

(b) Is the stock overvalued or undervalued in the marketplace?

(c) What is the reason(s) for your answer in (b)?

Solution

Answer a

Book Value of a Sharee => [ 1000000 - 350000] / 10000 => $65 per share

Answer b

Overvalued

Answer c

Market Value of assets might be greater than book value of assets.