If future expected return on common stockholders' equity is less than expected required return by equity holders then the market value of a company's stock should be less than book value.

Question

Quizplus · Accepted Answer

If the future expected return on common stockholders' equity is less than the expected required return, it means that investors are not confident about the company's growth potential and profitability. Therefore, they will demand a higher return on their investment which would result in a decrease in the market value of the company's stock. As a result, the market value of the company's stock should be less than its book value.

If Future Expected Return on Common Stockholders' Equity Is Less