Question

20. Which of the following is correct? a) A company’s book value reflects the company’s history of equity investment and retained earnings; a company’s market value reflects investors’ view of the company’s future earnings prospects. b) A company’s market value reflects the company’s history of equity investment and retained earnings; a company’s book value reflects investors’ view of the company’s future earnings prospects. c) A company’s book value and market value both reflect the company’s history of equity investment and retained earnings d) A company’s market value and book value both reflect investors’ view of the company’s future earnings prospects.

Answer 1

Answer:

a. A company's book value reflects the company's history of equity investment and retained earnings; a company's market value reflects investor's view of the company's future earning prospects.

Explanation:

The book value of a company is the residual equity and retained earnings after all liabilities paid. Market value is the view of investor's about the company and is what the company would be worth if it were to be sold.

Answer 2

Answer:

The correct answer is a) A company’s book value reflects the company’s history of equity investment and retained earnings; a company’s market value reflects investors’ view of the company’s future earnings prospects.

Explanation:

Book value is based on the historical cost, which arises as a result of the companies past financial and strategic decisions. Also, all the transactions the company had undergone affects this value as well.

The market value however, depends on how the investor see the company in the future. Companies that have high potential or an expected higher growth have the most investor confidence and because of that, better valuations.