Explanation

Correct Answer: B

Key Concepts:

1. Book Value of Equity represents the historical accounting value of shareholders' equity based on the balance sheet (Assets - Liabilities). It is not immediately affected by earnings forecasts.
2. Market Value of Equity represents the current market price of the company's shares, which is forward-looking and reflects investor expectations about future earnings.

Why B is Correct:

• An unexpected improvement in earnings forecast provides new information about the company's future profitability.
• This information immediately affects investor expectations, leading to changes in stock prices and thus the market value of equity.
• Book value of equity only changes when actual earnings are realized and retained earnings increase, or through other accounting transactions - not from forecasts.

Why A and C are Incorrect:

• A (Book value only): Book value is based on historical accounting data and doesn't change with forecasts.
• C (Both): Book value doesn't change immediately with earnings forecasts; only market value does.

Additional Context:

• Market value reflects investor sentiment and future expectations, while book value is based on historical cost accounting.
• This distinction is fundamental in financial statement analysis and equity valuation.