ACCA501GDB Solution

Market value of a firm is determined by below ratios. By calculating them we can see that XYZ's capital strcuture is more efficient that that of ABC

1. Earnings per share of XYZ is = EPS=Retained earnings/No of Shares = 200,000/85,000 = Rs 2.35
Earnings per share of ABC is =EPS = Retained earnings/No of Shares = 250,000/140,000 = Rs 1.78

2. Book Value per share = Common equity/shares outstanding
XYZ BV= (850,000+320,000+200,000)/85000= Rs 16.11
ABC BV = (1400,000+500,000+250,000)/140,000=Rs 15.35

3. Market price to Book value Ratio = Market value per share/BV per share
XYZ M/B = 15/16.11= 0.93
ABC M/B = 12/15.35 = 0.78