Market-to-Book Ratio

### What is the main function of the Market-to-Book Ratio? - [ ] Measure liquidity - [x] Compare a company's market price to its book value - [ ] Estimate future dividends - [ ] Calculate tax liabilities > **Explanation:** The primary purpose of the Market-to-Book Ratio is to compare a company's current market price per share to its book value per share, helping to assess how the market values its assets. ### A company has a market value per share of $60 and a book value per share of $30. What is its Market-to-Book Ratio? - [ ] 1 - [ ] 1.5 - [x] 2 - [ ] 3 > **Explanation:** The Market-to-Book Ratio in this case is \\( \frac{60}{30} = 2 \\), indicating that the stock is trading at twice its book value. ### If a company's liabilities exceed its assets, what happens to the Market-to-Book Ratio? - [x] It becomes negative - [ ] It becomes zero - [ ] It equals one - [ ] It exceeds five > **Explanation:** When liabilities exceed assets, the book value becomes negative, potentially leading to a negative Market-to-Book Ratio. ### What does a Market-to-Book Ratio below 1 generally indicate? - [ ] Overvaluation - [x] Undervaluation - [ ] Strong market confidence - [ ] High growth potential > **Explanation:** A Market-to-Book Ratio below 1 typically suggests that the company is undervalued, as its market price is less than its book value. ### Which factor can influence the Market-to-Book Ratio to increase? - [x] Higher market value per share - [ ] Increase in total liabilities - [ ] Higher book value per share - [ ] Market downturn > **Explanation:** An increase in the market value per share directly causes the Market-to-Book Ratio to increase, reflecting higher investor confidence or growth prospects. ### Can depreciating assets affect the book value and the Market-to-Book Ratio? - [x] Yes - [ ] No - [ ] Only if assets are sold - [ ] It depends on the industry > **Explanation:** Depreciating assets decrease the book value, which can lower the Market-to-Book Ratio if the market value remains constant. ### What type of companies typically have higher Market-to-Book Ratios? - [x] Growth companies - [ ] Distressed companies - [ ] Mature companies - [ ] Retail companies > **Explanation:** Growth companies generally have higher Market-to-Book Ratios due to the market's expectations of their high future growth and profitability. ### How can a company’s strategic initiatives impact its Market-to-Book Ratio? - [x] Strategic initiatives like new product launches or expansions can increase market value, boosting the ratio. - [ ] They only affect the book value. - [ ] Usually lead to lower ratios. - [ ] They have no impact. > **Explanation:** Positive strategic initiatives can increase investor confidence and market value, thereby raising the Market-to-Book Ratio. ### What does an excessively high Market-to-Book Ratio suggest about a company? - [ ] Underpricing - [ ] Market pessimism - [x] Possible overvaluation - [ ] Financial distress > **Explanation:** An excessively high Market-to-Book Ratio may suggest that a company's stock is overvalued, reflecting overly optimistic investor expectations. ### When assessing stocks, why might the Market-to-Book Ratio alone be insufficient? - [x] It should be used alongside other financial metrics for a comprehensive analysis. - [ ] It fluctuates too much daily. - [ ] It only applies to large companies. - [ ] It is only relevant for tech stocks. > **Explanation:** While useful, the Market-to-Book Ratio should be complemented with other financial metrics to provide a more complete assessment of a company's valuation.