Vinnie's Motors of Winnipeg has a market-to-book ratio of 3. The book value per share is $4.00. This means that a $1 increase in the book value per share will:
A) Cause the accountants to increase the equity of the firm by an additional $2.
B) Increase the market price per share by $1.
C) Increase the market price per share by $12.
D) Tend to cause the market price per share to rise.
E) Only affect book values but not market values.

Question

Quizplus · Accepted Answer

The market-to-book ratio indicates how the market values a company compared to its book value. A change in the book value per share, especially an increase, tends to be viewed positively by the market and can cause the market price per share to rise, reflecting increased investor confidence or perceived value. However, the exact increase in market price cannot be determined solely from the information given, making D the correct choice.

Vinnie's Motors of Winnipeg Has a Market-To-Book Ratio of 3