ESB Group is the parent company of many related businesses under its banner. Each share of the parent company is quoted at $220. However, if this had to be assessed by adding the stock prices of each of its strategic business units, the value would only be $200 per share. In this scenario, what has ESB Group created?
A) capital liquidity
B) diversification premium
C) diversification discount
D) demand-pull inflation

Question

Quizplus · Accepted Answer

In this scenario, ESB Group has created a diversification premium. Companies that pursue related diversification are more likely to improve their performance. They create a diversification premium: the stock price of related-diversification firms is valued at greater than the sum of their individual business units.

ESB Group Is the Parent Company of Many Related Businesses