If market values of equity exceed book values of equity,then:
A) equity has been depreciated too rapidly.
B) the firm uses accrual-based accounting.
C) profit potential is expected to be attractive.
D) the firm is holding too much cash.

Question

Quizplus · Accepted Answer

When market values of equity exceed book values of equity, it implies that investors have a positive perception of the company's future earnings potential, leading to a higher demand for its shares and hence a higher market value. This indicates an expectation of attractive profit potential in the future. It does not necessarily imply that the equity has been depreciated too rapidly, or that the firm is using accrual-based accounting, or that the firm is holding too much cash.

If Market Values of Equity Exceed Book Values of Equity,then