Question

Could you answer the question below with some work?

Use this information for questions 1-4:
Boucher Service Company’s EPS is $3.00. The payout rate is 60%, the growth rate of earnings and dividends is 4%, and required return on equity is 7%. Boucher’s ROE is 10% and the firm’s net profit margin (NPM) is 5%. Assume the constant growth model is appropriate.

What is Boucher’s justified price/book ratio (P0/B0)? (Enter your answer to the nearest 0.01.)

Answer 1

Given about Boucher Service,

Earning per share E0 = $3

Payout ratio = 60%

growth rate g = 4%

So, Current dividend D0 = E0*payout ratio = 3*0.6 = $1.8

required return on equity r = 7%

=> Current stock price using constant dividend growth model is

P0 = D0*(1+g)/(r-g) = 1.8*1.04/(0.07-0.04) = $62.40

ROE of the company = 10%

So, book value of equity per share = Earning per share/ROE = 3/0.10 = $30

So, book value of equity per share B0 = $30

So, Price/Book ratio P0/B0 = 62.4/30 = 2.08