The price/earnings ratio is the price of one share of a company's stock divided by the earnings per share of the company. However, the same ratio can be calculated for the company as a whole. The market value of all the shares of stock outstanding divided by the company's net income available to common stockholders is equivalent to the P/E ratio except it is for all the shares of stock outstanding, not just one share. In this question, we know the net income available to common stockholders ($200,000), and we know the target P/E ratio (20). The market value of all the shares of stock outstanding (the price of one share multiplied by the number of shares outstanding) is therefore $200,000 × 20, or $4,000,000.
This is the company's sales multiplied by the industry price/earnings ratio. This is not the correct way to calculate the market value of a business.
This is the book value of the equity in the company. The market value of a company is different from its book value.
This is the company's operating income multiplied by the industry price/earnings ratio. "Earnings" as used in the price/earnings ratio refers to income available to common stockholders, or net income in this case.
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A competitor wishes to make a bid to acquire the stock of the company. What is the current market value?