VIII For a stock in a stable environment so that the constan

VIII For a stock in a stable environment so that the constant growth rate dividend discount formula is valid, the ratio of Price to Book Value of Equity per share (Po/Bo): A. is greater than one for those firms with a return on book value of equity higher than the market capitalization rate. B. depends on the retention ratio, return on book value of equity, and the market capitalization rate. C. all of the above D. none of the above

Solution

C all of the above

The Price to book ratio is the ratio of Market price to book value of share. A P/B Ratio greater than 1 means that the stock is overvalued. This is due to constant growth .

The Price of share depends upon the dividends paid out and this retention ratio, the ROE which also determines the growth rate and the Market capitalization as per Constant growth rate discount model.