An Argument for Using the Market Value of the Equity

question 5

Multiple Choice

An argument for using the market value of the equity when calculating leverage ratios is that

• A)it is more stable than the book value of the equity, which is easily manipulated.
• B)the market value of the debt is typically used in these ratios, so to be consistent the market value of the equity should be used.
• C)it is a measure of the economic value of a firm.
• D)All of the above are reasons that the market value of the equity should be used.

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Definitions:

Preferred Stock

A class of shares offering ownership in a company with fixed dividends and priority over common stock in asset liquidation, but typically without voting rights.

Revised Model Business

A business model that has been updated or adjusted to reflect changes in the market, technology, or company strategy.

Owners' Equity

Owners' equity represents the residual interest in the assets of a company after deducting liabilities, often referred to as shareholders' equity.

Legal Distributions

Payments made by a company to its shareholders or owners as declared in its corporate charter or bylaws and approved by regulators.