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.

Question

Quizplus · Accepted Answer

A firm's stock price is typically driven by its profitability and growth potential, among other factors. Therefore, if a firm is more profitable than average, it is likely that investors will be willing to pay a higher price for its shares, which would result in a stock price that exceeds its book value per share. Therefore, statement C is correct.

Statements A, B, D, and E are incorrect. A firm's DPS may or may not exceed its EPS, depending on its dividend policy. A firm's EBITDA is usually higher than its EBIT, not the other way around. If a firm is more profitable than most other firms, its stock price is more likely to exceed its book value per share, not the other way around. Finally, the more depreciation a firm has in a given year, the lower its EPS will be, all other things held constant.

Which of the Following Statements Is CORRECT