There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:
A) the change in the accounting rules of the period.
B) the difference between tax accounting and accounting for financial accounting purposes.
C) a large increase in the market value of equity that was greater than the increase in debt.
D) All of these.
E) None of these.

Question

Quizplus · Accepted Answer

The fact that the market value ratio of debt to debt and equity did not exhibit an upward trend despite the increase in the book value ratio suggests that the increase in the market value of equity was greater than the increase in debt. This could be due to factors such as stronger earnings, better market sentiment, or other events that resulted in the appreciation of equity prices. The other choices do not provide a clear explanation for why the market value ratio did not follow the book value ratio.

There Was an Upward Trend in the Ratio of the Book