Question

12. a. What change in the book value of the​ company's equity took place at the end of 2015​? .

b. Is the​ company's market-to-book ratio​ meaningful? Is its book​ debt-equity ratio​ meaningful? Explain.

c. Find the​ company's other financial statements from that time online. What was the cause of the change to its book value of equity at the end of 2015​? .

d. Does the​ company's book value of equity in 2016 imply that it is​ unprofitable? Explain.

2016 2015 23.7 Global Corporation Balance Sheet for 2016 and 2015 (5 millions) Assets Current Assets Cash Accounts receivable inventories Total current assets Long Term Assets Net property, plant, and equipment Total long-term assets 192 16.1 20.5 12.8) 14.6 47.9 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Notes payable/short-term debt Total current liabilities Long-Term Liabilities Long-term debt Total long-term liabilities Total Liabilities 59 113.5 113. 5 81.2 1.2 8 Stockholders' Equity Common stock and paid in surplus Retained earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity Total Assets 2.5

Answer 1

Assuming the question is a comparison between 2015 & 2016 as per figures in given image:

Ans 1. The Stockholder's equity has changed from $21 M in 2015 to $22.4 M in 2016. hence % change over 2015 is 6.66%

Ans 2. Market-to-book ratio: This is also called price-to-book ratio, this is a common tool used by analysts and investors to evaluate if a company's stock is undervalued or if it can be a good investment.

To calculate this mathematically we need to compute the market capitalization (MC) of the company or the company market value i.e. no. of shares outstanding x market price of the share.

In the given question the details are not given, normally a company when its listed its market capitalization can be found from the website under financial info but I could not find any website pertaining to the company mentioned in the question. So if you have details as part of the case study then you can compute using the above formula.

To calculate Market-to-book ratio= MC / net book value of the company.

Net Book Value =Total Assets - Total Liabilities or Total Stockholders equity. In 2015 the value is $21 M & in 2016 the value is $22.4 M

Usually P/B ratio of below 1 is not considered a good investment option but it should be kept in mind that its not the only parameter. One should consider other financial ratios too & the type of industry to asses an effective & standard P/B ratio for the company.

Debt-equity ratio helps to assess the financial leverage of the company , it reflects the ability of shareholder fund to cover all outstanding debts in case of financial distress.

Ans C. The book value of equity changes in a year if the company issues more shares thereby reducing the value per share.

Ans D. From the image its visible that Global Corp has positive retained earnings that means it is profitable and also increasing Y-o-Y. Company's book value of equity can imply the solvency condition of the company. If BV of equity is negative then it means liabilities have exceeded the assets for that period & in situation of liquidation the assets would not be enough to pay off the liabilities, also a continious Y-o-Y negative stockholder equity would result in the company becoming insolvent and also are unprofitable.