First Bank is a financial service firm that is in stable growth. Its current earnings are expected to grow 5% a year in perpetuity, and its stock has a beta of 0.90. If the Treasury bond rate is 6%, the market risk premium is 5.5%, and the stock is trading at a current PE ratio of 10.59, estimate First Banks return on equity.

How to get the answer?

Answer:

ROE=12.50%