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In: Finance

I'd like to discuss and learn what you think about one of the controversial issues in...

I'd like to discuss and learn what you think about one of the controversial issues in finance, both in corporate finance and asset pricing camps. That is about market-to-book ratio and its relation with the stock returns. My personal research agenda is also closely related to this field. For example, one camp argues that a high market to book ratio suggests the existence of valuable future growth options of that company. On the other hand, others argue that a high market to book ratio suggests the overvaluation and therefore future collapse of stock prices. I don't take a side.

I want you to think about these two sides, make a google search. It is beyond the exam coverage but it is definitely going to contribute to our understanding of the difference between book values and what is going in the real world (e.g., stock market).

Solutions

Expert Solution

Market to book value ratio is a financial ratio use to calculate the company current market value as compared to its book value.

Market value means the current market price of all outstanding shares of company which denotes its current worth. While book value means the value of company after realising all its assets and paid all its debt. It means net worth from the balance sheet of the company.

MB ratio=market capitalisation /total book value.

Uses -This ratio is used to analyse wheather stock is undervalued or overvalued. If ratio is less than 1 it indicates stock is very cheap and investor have a good earning chances by investing in particular company.If ratio is more than 1 it indicates that share is overvalued and there is very less chances if future increase in price and suggested to investor not to go for particular company share at this time.

So this is the way how stock market works and helping investors in taking there investment decision by analysing market book value ratio.

jeff jeffy answered 2 years ago
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