Why Doesn't Stockholders' Equity Equal the Market Value of Equity

question 81

Multiple Choice

Why doesn't stockholders' equity equal the market value of equity?

• A)Stockholders' equity usually does equal the market value of equity.
• B)Investors tend to incorrectly price the market value of equity.
• C)It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising.
• D)It's due to incorrect entries prepared by accountants.

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Definitions:

Return On Assets

A financial ratio that indicates the percentage of profit a company earns in relation to its overall resources. It demonstrates how effectively a company is using its assets to generate earnings.

Average Collection Period

A measure of the average number of days it takes a company to collect payments from its credit sales.

Du Pont Analysis

A method of performance measurement that breaks down return on equity into three component parts: profit margin, asset turnover, and financial leverage.

Pearson's Product-moment

A correlation coefficient that measures the linear correlation between two variables X and Y, giving a value between +1 and -1.