Question

Using the dividend valuation method, an analyst determines the value of Company A's stock to be $10 and the value of Company B's stock to be $14. Based on this information, which of the following statements is most accurate?

A. Company B must be riskier than Company A, and risk requires a reward.
B. Other things being equal, if Company A and Company B have the same firm value, Company B must have more debt, thus leveraging its returns for the benefit of shareholders.
C. Other things being equal, if Company A and Company B have the same firm value, Company A may have more shares of stock outstanding than Company B.
D. Company B's required rate of return is higher than Company A's required return.

Answer 1

C. Other things being equal, if Company A and Company B have the same firm value, Company A may have more shares of stock outstanding than Company B.

Step-by-step explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Formula to calculate the value of stock

Price = Dividend / ( Rate or return - growth rate )

It shows that higher the rate of return lower the value of asset. more more riskier company will have higher required rate of return.

If Company A and Company B have same value and Company A have more shares than B, then Company B will have more per share value than Company A.