Question

A firm has current assets that could be sold for their book value of $30 million. The book value of its fixed assets is $68 million, but they could be sold for $98 million today. The firm has total debt with a book value of $48 million, but interest rate declines have caused the market value of the debt to increase to $58 million. What is this firm's market-to-book ratio

Answer 1

Answer:

The market-to-book value ratio = market value is to book value of the firm

= $70 : $50 (in millions)

= 7: 5

= 1.4 : 1

Explanation:

a) The book value of the firm is calculated as follows:

Current assets =  $30,000

Fixed assets =        68,000

less liabilities =      (48,000)

Net book value = $50,000

b) The market value of the firm is calculated as follows:

Current assets  =    $30,000

Fixed assets =           98,000

less liabilities =        (58,000)

Net market value = $70,000

c) The market-to-book ratio is a financial metric that calculates the relationship between the market value and the book value of the firm.  The market value represents what the firm's net assets are worth in the market.  The book value represents the firm's net assets according to the records kept, which are usually based on the historical costs of assets and liabilities.