Nu-Tech Software Co. went public three months ago.

A) The firms stock has a market price of $20 per share and a book value of $12 per share. If its cost of equity capital is 15% and its book value is expected to grow at 5% per year indefinitely, determine the markets assessment of its steady state return on equity using the discounted abnormal earnings model.

1. Calculation:

2. Answer:

B) If the stock price increases to $35 and the market does not expect the firms growth rate to change, what is the revised steady state ROE?

1. Calculation:

2. Answer:

C. If instead, the price increase was due to an increase in the markets assessments about long-term book value growth rather than long-term ROE, what would the price revision imply for the steady state growth rate?

1. Calculation:

2. Answer: