Question

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 $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________.

Answer 1

Answer:

Market to book ratio is 1.8333

Explanation:

Given,

Book value of current assets = $10 million

Book value of fixed assets = $60 million

Selling value = $95 million

Firm total debt = $40 million

Debt to current market value = $50 million

So, computing the market values as:

Market value = Book value of current assets + Selling value - Debt to current market value

Market value = $10 million + $95 million - $50 million

Market value = $55 million

Computing book values as:

Book value = Book value of current assets  + Book value of fixed assets - Firm total debt

Book value = $10 million + $60 million - $40 million

Book value = $30 million

Now, computing the market to book ratio as:

Market to book ratio = Market value / Book value

Market to book ratio = $55 million / $30 million

Market to book ratio = 1.8333