QUESTIONS 79 THROUGH 90 RELATE TO EQUITY INVESTMENTS

89. An analyst gathers the following information about two companies in the same industry:

Company A

Company B

Book value per share

$20

$10

Market price per share

$22

$13

Return on equity

16%

13%

Retention ratio

40%

60%

What is the most appropriate conclusion regarding investors’ expectations? Compared to

Company B, Company A has:

A. higher intrinsic value as reflected by its higher market price.

B. higher sustainable growth as reflected by its higher return on equity.

C. lower future investment opportunities due to its lower price-to-book ratio.