If the market value of a firm's assets is greater than the book value of its assets then the book value of the firm's liabilities and equity must be less than the market value of the firm's liabilities and equity.

Question

Quizplus · Accepted Answer

This statement is true because the market value of a firm's assets represents the current market price of these assets, which may be higher than the historical cost recorded in the firm's books. However, the book value of liabilities and equity is based on historical costs and may not reflect their current market value. Therefore, if the market value of assets is greater than the book value of assets, then the market value of liabilities and equity must also be greater than their book value to satisfy the accounting equation: Assets = Liabilities + Equity.

If the Market Value of a Firm's Assets Is Greater