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Q13-8B

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Essentials Of Investments
Found in: Page 436
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $90 million today.

The firm has total debt with a book value of $40 million, but interest rate declines have caused the market value of the debt to increase to $50 million. What is this firm’s market-to-book ratio?

Answer

1.6667

See the step by step solution

Step by Step Solution

Step 1: Given information

Market Value of assets = (Book value + Fixed Asset value)

= ($10 million + $90 million)

= $100 million

Market value of debts = $50 million

Step 2: Calculation of market value of the firm

Market value of firm = Market value of assets – Market value of debts

=$100 million - $50 million

= $50 million

Step 3: Calculation of book value of the firm

Book value of firm = Book value of assets – Book value of debts

= ($10 million + $60 million) - $40 million

=$ 30 million

So market to book ratio = Market value of firm / Book value of firm

= $50 million / $30 million

= 1.6667

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