equity

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

equity

Postby chandniwadhwani92 » Tue Nov 04, 2014 5:17 pm

1-Difference between book value per share and price to book ratio???
2- As we know book value increases when net income increases
But in schswer it is given ROE increase when when book value is decreasing more rapidly than net income...
What does it means how book value would be decreasing than net income?????

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

equity

Postby edupristine » Wed Nov 05, 2014 10:21 am

1) Price to Book ratio = Market Price per share/ Book Value per share


2) ROE = Net Income / Av. Book Value

A higher ROE is viewed as a positive aspect for the company, but the reason behind it should be examined.

From the equation above, we can see that if book value is decreasing more rapidly than net income, the ratio will increase, but this is not good for the firm.

The statement given by you says that ROE will increase when the book value decreases i.e the denominator decreases. But the decrease in the book value (Dec in denominator) has to be greater than the decrease in net income (Dec in numerator).


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