The market price of a share of common equity reflects

Question

BlackTom AI · Accepted Answer

The question asks what the market price of a share of common equity reflects, so we must evaluate each statement against the fundamental idea that stock prices incorporate information and expectations about the future.
Option 1: 'book value plus the present value of future residual income.' This mixes concepts from fundamental valuation models, but stock prices are not simply the sum of book value and PV of residual income for all cases; the market price reflects broader discounted cash flows and expectations, not a specific formula that always aligns with this expression. In addition, residual income models are one approach, but the stock price is not universally defined this way, so this option is too narrow and not universally accurate.
Option 2: 'the present value of future residual income.' This is a viable valuation perspective (residual income models), yet saying the market price “reflects” only this PV of residual income is incomplete. There are multiple models and factors (dividends, cash flows, risk, growth, sentiment) that the market aggregates, so restricting to PV of residual income misses other contributions and is thus not a complete description of what prices reflect.
Option 3: 'None of the suggested answers' If any of the other options captured the true idea, this would be false. Given that one option does align with the standard idea that prices reflect broader expectations, this choice would not be correct.
Option 4: 'the aggregated expectations of all of the market participants following that particular stock.' This aligns with the efficient market viewpoint: the price embodies the collective beliefs, information, and expectations of all participants about future dividends, cash flows, risks, and fundamentals. It captures the general mechanism by which market prices are formed rather than tying price to a single formula.
Option 5: 'the correct value for the particular stock.' This implies a precise intrinsic value exists as a single fixed target, which is not what the market price reflects at any given moment. Prices fluctuate as expectations change, so this option misconstrues what the price represents.
In summary, several options refer to valuation components or methods, but the most accurate overarching description of market price is that it mirrors the aggregated expectations of all market participants about the stock’s future. The remaining options either propose overly narrow formulas, misstate what prices reflect, or imply a fixed intrinsic value rather than a consensus view of future prospects.

BU.210.650.51.FA25 Final Exam- Requires Respondus LockDown Browser

The market price of a share of common equity reflects

View Explanation

Log in for full answers

Similar Questions

An efficient market does not require that:

Question1.2 In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be:Select one alternative: negative and small. zero positive and large. negative and large. positive and small. ResetMaximum marks: 2.5 Flag question undefined

Is the following statement regarding market efficiency true or false? “The efficient market hypothesis assumes that forecasts are unbiased”[Fill in the blank]

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler