Calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate.
C is correct. The price-to-book ratio, which is also referred to as the market-to-book ratio, provides an indication of investors’ expectations about a company’s future investment and cash flow-generating opportunities. The larger the price-to-book ratio (i.e., the greater the divergence between market value per share and book value per share), the more favorably investors will view the company’s future investment opportunities. In this case, as shown below, Company A has lower price-to-book ratio than Company B and therefore an expectation of lowe future opportunities.