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Exercise 5.5 A firm with book value of $15.60 per share and 100% dividend payout is expected to have return on common equity (ROCE) of

Exercise 5.5

  • A firm with book value of $15.60 per share and 100% dividend payout is expected to have return on common equity (ROCE) of 15% per year indefinitely in the future.
  • Its cost of equity capital is 10%.
  1. Calculate the value per share.
  2. Calculate the P/B ratio.
  3. Suppose the firm announced that it would reduce its payout ratio to 50% of earnings in the future. How would this affect your P/B ratio?

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