Question

Assume that Bank of America Corp. reported a net loss of $584 million for the fiscal quarter. That day, Bank of America’s stock price climbed from $16.23 per share to $16.37. This demonstrates that: A) Equity valuation models are not related to company earnings B) Dividends are unrelated to earnings C) Equity valuation models can be irrational D) The net loss was smaller than investors expected E) All of the above

Answer 1

Option (E) is correct

All the statements given are correct.

There was a net loss of $584 million. Despite the net loss, share price rose from $16.23 to $16.37 per share. It means that equity valuation models are not related to company earnings. We use dividend while calculating the value of equity, because share prices rose, so there should be some dividends paid. But, there was net loss too. It means that dividends are also unrelated to earnings. Investors would have estimated a net loss more than $584 million that is why they are willing to pay higher share price.