Answer:
Market value of equity / book value of equity 72/52 = 1.38
The company is a little overvalued.
It means that the assets they have because the rate is declining, have a higher yield than the market, that's why their market value increase, therefore the investor will pay more to acquire the company or shares of the company because their profits will be above the common of the industry.
Explanation:
concept book value market value diference
current assets 32 millons 32 millons 0
long term assets 70 millons 100 millons +30,000,000
liabilities 50 millons 60 millons -10,000,000
<em>TOTALS 70+32 - 50= 52 32+100-60=72 +20,000,000</em>
Market value of equity / book value of equity 72/52 = 1.38
This ratio <em>tries to determinate if a company is being undervalued or overvalued.</em>
It is <u>usually good to </u>help a third party at the task of determinate whether or not <em>a company's market value is suffering from speculation</em> (when extremely overvalued)
When the ratio is <u>below 1 It will mean that it is undervalued.</u> The manager may interpret this that third parties see the company cheap while trading.
When it is <u>above 1, it is overvalued,</u> this means an investor will pay more for a portion of the company than it really has. This can lead to thinking that forecast profit is rising and because of that the investors are paying a premium. But if it gets really high, then it is saying that the company is subject to speculation and the price bubble may explode anytime.
