Which of the Following Statements Incorrectly Describes the Relationship Between

question 59

Multiple Choice

Which of the following statements incorrectly describes the relationship between a company's book value per share and its market price per share?

• A)If the book value per share is below the market value per share,then shareholders are paying for the future earnings power of the company.
• B)If a company has unrecorded assets or appreciated assets,the market value per share is likely to be greater than the book value per share.
• C)Since the book value per share is based on historical costs,the book value per share can never be greater than the market price per share.
• D)Use of the book value per share can be highly questionable for many companies,since it is based on balance sheet amounts that in turn are based upon historical costs.
• E)If the market value of a company's assets is much greater than the assets' historical costs,then the market price per share will likely be greater than the book value per share.

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Definitions:

Cash Flow on Total Assets

A measure of the efficiency with which a company generates cash from its assets, calculated as cash flow from operations divided by total assets.

Ability to Meet Obligations

A financial assessment of whether a company or individual has the resources necessary to pay off their debts as they come due.

Return on Assets

A profitability ratio that measures how efficiently a company is using its assets to generate earnings.

Direct Method

In cash flow reporting, a method that shows the specific sources and uses of cash, categorizing cash flows into operating, investing, and financing activities.