The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, X Ltd. and Y Inc., are presented below. The two companies are direct competitors in the same industry sector, produce the same product and sell it to the same set of customers. They have the same scale of operation and the same capital structure. The average values of the market-to-book (M/B) and forward price-earnings (P/E) ratios for the industry sector are also presented below.

X Ltd. Y Inc. Industry Mean

Price-Earnings (P/E) ratio 9.00 2.50 5.00

Market-to-Book (M/B) ratio 1.25 0.75 3.90

Based on this information, which of the following statements MUST be TRUE?

	1.	The market believes that X Ltd.s earnings (NPAT) will increase more than the earnings (NPAT) of Y Inc.
	2.	The market believes that the two companies have the same risk since they have the same capital structure
	3.	The market believes that the abnormal earnings (residual income) of both X Ltd. and Y Inc. are negative because each has a market-to-book (M/B) ratio that is well below the industry mean value
	4.	The market believes that X Ltd.s abnormal earnings (residual income) will increase more than the abnormal earnings (residual income) of Y Inc.