Reference no: EM132940614

Problem 1: Statement 1: A stock that sells for less than book value is undervalued. Statement 2: If a company's return on equity drops, its price/book value ratio will generally drop more than proportionately, i.e., if the return on equity drops by half, the price/book value ratio will drop by more than half.

a. Both statements are True

b. Both statements are False

c. Only the first statement is true

d. Only the second statement is true

Problem 2: A firm has current assets that could be sold for their book value of P10 million. The book value of its fixed assets is P60 million, but they could be sold for P95 million today. The firm has total debt at a book value of P40 million, but interest rate changes have increased the value of the debt to a current market value of P50 million. This firm's price-to-book ratio is

a. 1.83

b. 1.5

c. 1.35

d. 1.46