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Stock and market values

Thompson Inc plans to issue preferred stock with a perpetual annual dividend of $2 per share and a par value of $25. If the required return on this stock is currently 8%, what should be the stock?s market value?

a. $22.00

b. $23.00

c. $24.00

d. $25.00

e. $26.00

Companies A and B each reported the same earnings per share (EPS), but Company J?s stock trades at a higher price. Which of the following statements is correct?

a. Company A must have a higher P/E ratio.

b. Company A must have a higher market-to-book ratio.

c. Company A must be riskier.

d. Company A must have fewer growth opportunities.

e. Company A must pay a lower dividend

Solution This solution is FREE courtesy of BrainMass!

Thompson Inc plans to issue preferred stock with a perpetual annual dividend of $2 per share and a par value of $25. If the required return on this stock is currently 8%, what should be the stock?s market value?
Market value of stock = Perpetual Annual dividend / required rate of return
=$2/8%=$25

d. $25.00

Companies A and B each reported the same earnings per share (EPS), but Company J?s stock trades at a higher price. Which of the following statements is correct?
Nothing is mentioned about company J's EPS, PVGO or risk. Is this question correct. Is it talking about stock B.
Nayway Price = EPS1/r + PVGO
If company A has a higher P/E, then given same EPS, company A will have higher price. Market to book value does not provide any information as we do no know the book value of each company. If company A is riskier we will use higher discount rate and hence the PV would be less, so this might be one correct option. If A has less growth opportunities its stock price will be lower. So this is another option which may be correct. If company A pays lower dividens that means higher plowback and hence higher PVGO, so this cannot be correct. So even if the company belongs to same risk class and both companies haev same EPS, stock A can sell at lower price if PVGO is less. Thus, best option is d.
d. Company A must have fewer growth opportunities.