Chartered Financial Analyst (CFA) Level 1 Practice Exam

How is Book Value per Share calculated?

1. Common equity / shares outstanding

2. Net income / total assets

3. Cash flow from operations / total liabilities

4. Retained earnings / common equity

The correct answer is: Common equity / shares outstanding

Book Value per Share is calculated by dividing the total common equity by the number of shares outstanding. This metric reflects the value of a company's equity attributable to common shareholders, presenting a per-share basis that is useful for both investors and financial analysts when assessing the company's net asset value. When calculating book value per share, common equity represents the residual interest in the assets of the company after deducting liabilities, ensuring that the amount accurately reflects only what is owed to common stockholders. The result provides insight into what each share would be worth if the company were liquidated at that moment, contributing to investment decisions and valuation assessments. Other options in the question represent different financial ratios or measures that do not pertain to the calculation of Book Value per Share. For example, net income compared to total assets pertains to return on assets, while cash flow from operations relates to liquidity and operational efficiency rather than equity valuation. Retained earnings divided by common equity would give an idea about how much of the equity has been retained versus distributed, but it does not provide the per-share calculation necessary for determining the book value per share directly.