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

A market-to-book ratio of 3 means the market price per share is three times the book value per share. Therefore, a $1 increase in book value per share will tend to cause the market price per share to increase by three times, or $3. So, the correct answer is D.

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