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.

Question

Quizplus · Accepted Answer

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.

A Firm Has a Market to Book Value Ratio That