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At time 0, firms A and B have identical assets and business operations. The prices of...

At time 0, firms A and B have identical assets and business operations. The prices of their shares at time 0 are the same at $10. Firm A always pays dividend and firm B never pays dividend. Without debt, which one combination below could be their possible share prices at year 5,

(A) share A = $10, share B = $10,

(B) share A = $12, share B = $10,

(C) share A = $10, share B = $8,

(D) share A = $6, share B = $10.

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Answer #1

The possible share price of firm A is greater than the share price of firm B because firm A pays dividend and both the companies do not have debt. We expect the share price of A to increase above the current price of $10 because of the consistent dividend it pays.

The correct answer is option B. share A = $12, share B = $10

Options A and D are incorrect because share price of A must be greater than share price of B

Option C is incorrect because we expect an increase in share price of firm A

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