A high price-to-book ratio may indicate which one of the following?
A) The firm expanded its plant and equipment in the past few years.
B) The firm is doing a poorer job controlling its inventory expense than other related firms.
C) Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.
D) All of these options.

Question

Quizplus · Accepted Answer

A high price-to-book ratio indicates that investors are willing to pay a premium over the book value of the company's assets because they believe the company has the potential for higher future earnings. This implies that investors believe the company has opportunities for earning a rate of return in excess of the market capitalization rate. Options A and B are incorrect as they do not necessarily relate to a high price-to-book ratio.

A High Price-To-Book Ratio May Indicate Which One of the Following