Task: Explain how accumulated retained earnings impact the book value of a firm's stock.
Say the current market price of this firm's stock on the NYSE is $56.25 per share and the book value of the stock is $45 per share:
Question 1. Give two reasons why the market book share prices might be different. Be specific.
Question 2. If the market for the firm's stock is "efficient," which price (Market or book) is probably a more accurate measure of the true value of the firm's stock? Explain your answer.
Question 3. If you were to form a ratio of market price per share to book price per share for this firm, what kind of information about the firm would this ratio give you (Assume you are thing about investing the firm's stock)?
Question 4. If the firm were to buy back some of its outstanding stock, explain how this action might affect the book value and the market value of the stock.
Question 5. If this firm's market-to-book value ratio was less that 1.00, what this would suggest about the market's assessment of the valuation of the firm going forward.