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Under what circumstances would market to book value ratios be misleading?

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Question added by Divyesh Patel , Assistant Professional Officer- Treasury , City Of Cape Town
Date Posted: 2014/04/06
SREEDEVI SUNILKUMAR
by SREEDEVI SUNILKUMAR , Business finance officer , Emirates Airline

The Market to Book ratio is useful, but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likely to be different than the book value. For instance, the assets of a firm may be worth more or less than the value at which they are currently carried on the company's balance sheet. In addition, the current market price of the company's bonds and preferred stock may also differ from the accounting value of these claims.

 

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