Question

8. Assume that the constant growth rate dividend discount model can be applied. You are given that the present value of growth opportunities (PVGO) for a firm is $5 per share. Its beta is 2.25, and it expects to earn $2 per share next year. The risk-free rate is 2% per year and (EM –Rf), the market risk premium is 8%. The firm’s earnings and dividends are expected to grow at 10% per year in perpetuity. (1.5 points each for a total of 12 points)

(e). Work out the return on the book value of equity for this firm.

(f). Work out the book value of equity per share for this firm.

(g). Work out the Price to book ratio for this firm.

(h). What other information will you need to be able to work out the Price to Revenues ratio for the firm?

Answer 1

Now growth rate =ROE*Retention rate
10% =ROE*33.33%
ROE=30%
Return on book value of Equity =30%	Ans e.
Assume Book Value =B
So , B*30%=3
B =10
So book Value per share =$10	Ans f
Price to Book ratio/share =20/10=2	And g.
Ans h.
Price to revenue ratio= Market value per share/ Sales revenue per share.
To get that wratio we need the Sales revenue and no of shares outstanding.