question 1

The markettobook asset ratio (M/B ratio) related to the pricetobook ratio is defined

as the ratio of the market value of a company to the book value of its assets. Recall that the

market value is the present value of cash flows, or the sum of the market value of debt and

equity. The M/B ratio is often considered a performance measure. For example, if a

company has an M/B ratio of 1.5, this means that for every dollar invested in assets, the

company has created an extra 50 cents. Therefore, companies with M/B ratio above (below)

1 are deemed to have created (wasted) value. Companies with higher M/B ratios are

deemed to be performing better.

Now consider a company that has 3 divisions. Division 1 produces Electronic Goods, Division

2 produces Food Products, and Division 3 produces Apparel. You are asked to evaluate this

companys performance. You are given the following information. The average marketto-book

ratio of assets (M/B ratio) for companies that are pure plays in each of these three

lines of business are, respectively, 1.2, 1.7 and 1.3.

The book values of the companys assets in these three divisions are, respectively, 20

million, 30 million, and 40 million. The company has 40 million in debt, and 5 million shares.

Its current share price is $13 per share.

Requirements

Do you think this company is performing well? Please justify your answer.