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

Next > < Previous

Related Solutions

ABC and XYZ are two identical firms except for their capital structure. The share price for...

ABC and XYZ are two identical firms except for their capital structure. The share price for both of firms is $10. ABC is an all equity firm. XYZ has D/E of 0.8. Investor A bought 100 shares of XYZ with his own money since he believes the levered firm will provide better return. If you decide to use homemade leverage to show him that leverage doesn’t matter, what would be your trading strategy? Please be specific (i.e. how much money...

a) Two firms, ABC Ltd and XYZ Ltd, are identical in every respect apart from their...

a) Two firms, ABC Ltd and XYZ Ltd, are identical in every respect apart from their capital structure. Both will earn $284 million if the market swings upwards and $100 million in a downward swing. There is an even chance of the market swinging upwards or downwards. ABC Ltd has no debt. XYZ Ltd has issued $800 million of its debt at an interest rate of 10% and hence, $80 million of its income is paid out as interest. Assume...

ABC and XYZ are identical firms in all respects except for their capital structure. ABC is...

ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $95,000 and all income will be distributed as dividends. Ignore taxes. a. Richard owns $30,000 worth of XYZ stock. What rate of return is he expecting? b. Show how Richard...

1. ABC and XYZ are identical firms in all respects except for their capital structure. ABC...

1. ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $95,000 and all income will be distributed as dividends. Ignore taxes. a. Richard owns $30,000 worth of XYZ stock. What rate of return is he expecting? b. Show how...

Firms ABC and XYZ are identical except for their use of debt and the interest rates...

Firms ABC and XYZ are identical except for their use of debt and the interest rates they pay. ABC has more debt and must pay a higher interest rate. Based on the data as shown below, how much higher or lower will ABC's ROE be versus that of XYZ, i.e., what is ROEABC – ROEXYZ? Applicable to Both Firms Firm ABC's & Data Firm XYZ's Data Assets $3,000,000 (same for both ) Debt ratio 70%(ABC COMP.) Debt ratio 20%(XYZ COM)...

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure....

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $375,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $73,000. Ignore taxes. A) You own $56,250 worth of XYZ’s stock. What rate of return are you expecting? B) Calculate the cash flows and rate of return...

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure....

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 5.2 percent. Both firms expect EBIT to be $79,000. Ignore taxes. a. Richard owns $60,000 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer...

ABC co. And XYZ co. are identical firms in all respects except for their capital structures....

ABC co. And XYZ co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt, it’s stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $71,000. Ignore taxes A.) Richards owns $39,000 worth of XYZ’s stock. What rate of return is he expecting? B.) Suppose Richard invests in ABC co. and uses homemade...

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure....

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 5.2 percent. Both firms expect EBIT to be $79,000. Ignore taxes. a. Rico owns $60,000 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer...

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure....

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $875,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $437,500 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $91,000. Ignore taxes. NOT EXCEL a. Richard owns $87,500 worth of XYZ’s stock. What rate of return is he expecting? b. Suppose Richard invests in ABC...

Subjects