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Supposed that you have two firms, ABC and XYZ. Both firm have an identical return on...

Supposed that you have two firms, ABC and XYZ. Both firm have an identical return on equity of 12%, but the market price of ABC stock is $25/share and the market price of XYZ is $50/share. Wxplain at least two potential reasons for disparity.

Solutions

Expert Solution

Market price of share is depend on three variable,that is

i)Required rate of return on share

ii)Expected dividend on it.

iii)growth rate of dividend

In the given case,required return on equity is same for both company's stock.Thus the reason for different market price may be:

i)Different expected dividend on stock of both companies or

ii)different growth rate of dividend.

jeff jeffy answered 2 years ago
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