Question

A firm has current assets that could be sold for their book value of $28 million. The book value of its fixed assets is $66 million, but they could be sold for $96 million today. The firm has total debt with a book value of $46 million, but interest rate declines have caused the market value of the debt to increase to $56 million. What is the ratio of the market value of equity to its book value? What is this firm's market-to-book ratio? (Round your answer to 2 decimal places.)

Answer 1

The market to book ratio of the firm is 1.41 times.

Step-by-step explanation:

Computing Book value of the equity is as:

Book value of equity = Book value of assets - Book value of debt

= (Book Value + Book Value of fixed assets) - Book value of debt

= ($28 + $66) - $46

= $94 - $46

=$48

Computing the Market Value of equity is as:

Market Value of equity = Market Value of assets - Market Value of debt

= (Book Value + Sold value) - Market Value of debt

=($28 + $96) - $56

= $124 - $56

= $68

Computing the Market to book ratio is as:

Market to book ratio = Market value / Book value

= $68 / $48

= 1.41 times