Question

For a non-dividend paying firm, an increase in net income must increase: A. both book value...

For a non-dividend paying firm, an increase in net income must increase:

  • A. both book value and market value of equity.
  • B. book value of equity.
  • C. market value of equity.
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Answer #1

B. book value of equity

Book value of equity is the value recorded in the accounting books and it is difference between Total assets and Liabilities. An increase in net income make increase in Total Assets of Firm resulting increase in Book value of Equity.

Market value of equity is value firm's equity in the stock market. In other words, it is sell price of equity in the stock market. It is decided by demand and supply rule. An increase in net income gives positive sign in stock market but it is not necessary it increases the market value of equity.

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