Answer: the company’s market value of equity only.

## Explanation An unexpected improvement in earnings forecast affects the **market value of equity** immediately, but **not** the book value of equity. ### Key Concepts: 1. **Book Value of Equity**: - Represents the accounting value of equity on the balance sheet - Calculated as: Assets - Liabilities - Changes only when actual accounting transactions occur (e.g., issuance of shares, retained earnings from actual profits) - A forecast announcement does NOT change the actual accounting records 2. **Market Value of Equity**: - Represents the market's valuation of the company - Calculated as: Share price × Number of shares outstanding - Changes immediately with new information that affects investor expectations - An unexpected positive earnings forecast signals higher future profitability, leading to higher expected future cash flows ### Why Option B is Correct: - Market participants immediately incorporate the new information into their valuation models - Stock price adjusts to reflect higher expected future earnings - This changes the market capitalization (market value of equity) - Book value remains unchanged until actual earnings are realized and reported ### Why Other Options are Incorrect: - **Option A**: Book value doesn't change with forecasts; only with actual accounting events - **Option C**: Book value is unaffected by forecast announcements ### Additional Insight: This distinction highlights the difference between accounting values (historical, based on GAAP/IFRS) and market values (forward-looking, based on investor expectations).

Author: LeetQuiz .