Which one of the following is true concerning the market-to-book ratio?
A) Extending the depreciation life of a ﬁrm's assets will increase the market-to-book ratio.
B) A decrease in the price of the stock on the stock exchange will increase the market-to- book ratio.
C) An increase in the market value of the common stock will increase the market-to-book ratio.
D) The market-to-book ratio is of most interest to the creditors of a ﬁrm.
E) The market-to-book ratio provides the selling price of a ﬁrm's inventory.

Question

Quizplus · Accepted Answer

The market-to-book ratio is calculated by dividing the market value per share of a company by its book value per share. Therefore, an increase in the market value of the common stock (numerator) will increase the market-to-book ratio. Choice A is incorrect because extending the depreciation life of a firm's assets will decrease the book value of the firm, resulting in a lower market-to-book ratio. Choice B is incorrect because a decrease in the stock price will decrease the market value per share, resulting in a lower market-to-book ratio. Choice D is incorrect because the market-to-book ratio is of more interest to equity investors than creditors. Choice E is incorrect because the market-to-book ratio does not provide information about the selling price of a firm's inventory.

Which One of the Following Is True Concerning the Market-To-Book