20 p Data regarding the stocks of two companies is given below. As indicated, ea
ID: 2807745 • Letter: 2
Question
20 p Data regarding the stocks of two companies is given below. As indicated, each stock is valued at $100 per share by investors. For which company is it more logical to assume that investors value the stock for its profitability? How can you tell? Make reference to specific data and explain your reasoning briefly a. b. For which company is it more logical to assume that investors value the stock for its growth tential? How can you tel? Make reference to specific data and explain your resoning briefly EPS P/E Price Company A Company B S2 $25 50 4 $100 $100Explanation / Answer
a. For the profitability purpose, the investors would value Company A, being the high Beta stock, which could go up to any extent irrespective of the EPS. Had the market going down, the Beta stock use to drop at the higher rate to other stocks. Higher the P/E ratio, the more profitability of the stock. The investor use to enter and exit of the stock to make profit and do not hold the same being highly risky stock.
b. For the growth potential purpose, the investors would prefer Company B, whose market price is almost stable because of the low Beta stock and the higher EPS of the company. On the market going down, the stock would stable due to stability in the earnings of the company. The EPS of the Company B would be growing year by year, so the market price of the stock will not deviate to much of their highest price ever. The investors use to hold the stock for the long period being higher growth in the stock.
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