Question #62

Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf

Page: 22

Status: Correct

Correct Answer: A

Part of Context Group: Q61-62
Shared Context
- Immediately after the spin-off, Country Point's book value per share is closest to: A) $16.25. B) $5.56. C) $11.12.
Question
Based on Bernheim's careful analysis, firms comparable to Country Point trade at a P/B ratio of 3.5 times. The expected price per share of the spin-off based on this P/B ratio and assuming a liquid and efficient market for Country Point's common shares is closest to:
Answer Choices:
A. $38.92
B. $19.46
C. $56.88
Explanation
Based on the comparable P/B ratio of 3.5 times, we can simply multiply the book value of $5.56 by 3.5 to arrive at $19.46.
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