Asked by Lyric Bolden on May 16, 2024
Verified
A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies
A) the firm has a higher P/E ratio than other firms in the industry.
B) the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C) the firm is more profitable than other firms in the industry.
D) the firm is utilizing its assets more efficiently than other firms in the industry.
Market To Book Value
A financial ratio used to compare a company's current market price to its book value, indicating how much shareholders are paying for the net assets of a company.
ROE
Return on Equity, a measure of financial performance calculated by dividing net income by shareholders' equity, indicating how efficiently a firm uses its equity to generate profit.
- Analyze the impact of financial ratios on an organization's performance against industry norms.
- Grasp the variance and significance of market-to-book value compared to price-to-earnings ratios in financial scrutiny.
Verified Answer
FA
Fatin AsyiqinMay 21, 2024
Final Answer :
A
Explanation :
A lower ROE compared to the industry average suggests the firm is less profitable or efficient in generating earnings from its equity. However, if the market to book value ratio is equivalent to the industry average, it implies the market has similar expectations for the firm's growth or profitability as it does for the industry, which can lead to a similar or higher P/E ratio if investors are pricing in future growth or improvement.
Learning Objectives
- Analyze the impact of financial ratios on an organization's performance against industry norms.
- Grasp the variance and significance of market-to-book value compared to price-to-earnings ratios in financial scrutiny.