Question

ABC Corp. has earnings of $0.54 per share. XYZ Corp. is a close competitor, with $1.01 earnings per share. If XYZ stock is currently trading at $29.76 and you believe that the stocks are comparable, what would be a reasonable price expectation for ABC stock?

Answer 1

If the two stocks are comparable, then we can safely assume that these companies would have similar dividend yields as well.

As the earnings of XYZ corporation is higher than ABC, we can assume that the dividend paid will also be higher. As a result of which the stock price would be higher than the stock price of ABC which is $29.76. So we can reasonably assume that the stock price would be higher than $29.76.

To support my argument let me discuss the Gordon growth model :

Po = D1/ Re - g

Where D1 is the dividend paid next year,

Re is the required rate of return

G is the growth rate.

So, as the dividend paid is higher ,the stock price will also be higher.