Answer to Question #11899 in Economics for Vera Ousley

Question

Which of the following statements is CORRECT?
a. Typically, a firm’s DPS should exceed its EPS.
b. Typically, a firm’s EBIT should exceed its EBITDA.
c. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.
d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

Answer 1

The CORRECT answer is C. When firm's stock price exceeds its book value per
share then firm's assessts are divided the number of shares outstanding shows
that the stock is overvalued. In case the stock is perfectly fairly valued, the
stock price equals the book value per share. A stock selling below book, if
there are no negative issues surrounding the company, is considered a bargain.
There can be legitimate reasons for a stock selling above book value; if the
company is growing quickly and the price is trending high prior to an earnings
report, for example.