Reference no: EM133114103

Suppose again that ABC uses all the proceeds from the debt issuance to repurchase stocks. Several months after the completion of the share repurchase program, an analyst downgrades the stocks. She argues that "[...] with a market-to-book ratio much higher than that of his peers, there are strong signals that stocks of ABC are overvalued. We expect this mispricing to close up in the next few months." (Note: equity market-to-book ratio is a popular measure of stocks ' over- or under-valuation). Compute the market-to-book ratio after the share repurchase and compare it to the market-to-book ratio before the interview. Discuss whether, in this particular context, market-to-book ratio is a valid measure of stock overvaluation.