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30 March, 12:06

A firm has current assets that could be sold for their book value of $28 million. The book value of its fixed assets is $66 million, but they could be sold for $96 million today. The firm has total debt with a book value of $46 million, but interest rate declines have caused the market value of the debt to increase to $56 million. What is the ratio of the market value of equity to its book value? What is this firm's market-to-book ratio? (Round your answer to 2 decimal places.)

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  1. 30 March, 14:10
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    The market to book ratio of the firm is 1.41 times.

    Explanation:

    Computing Book value of the equity is as:

    Book value of equity = Book value of assets - Book value of debt

    = (Book Value + Book Value of fixed assets) - Book value of debt

    = ($28 + $66) - $46

    = $94 - $46

    =$48

    Computing the Market Value of equity is as:

    Market Value of equity = Market Value of assets - Market Value of debt

    = (Book Value + Sold value) - Market Value of debt

    = ($28 + $96) - $56

    = $124 - $56

    = $68

    Computing the Market to book ratio is as:

    Market to book ratio = Market value / Book value

    = $68 / $48

    = 1.41 times
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