Q6. Price Multiples (10 mark) According to many analysts, Macquarie Inc.'s current market price is $20 per share and its book value is $10 per share. Analysts forecast that the firm's book value will grow by 3% per year indefinitely, and the cost of equity is 6%. The price-to-book ratio can be derived with the following formula: = 1+ ROE-r r-g (1) Given these facts, what is the market's expectation of the firm's long-term average ROE? (2 mark) (2) What will be Macquarie Inc.'s share price if the market revises its expectations of long-term average ROE to 13%? (2 mark) (3) Following the sub-question (2), assuming long-term ROE is 13%, what is Macquarie Inc.'s price-to-earnings (P/E) ratio? (3 mark) 11 (4) We often find the time-series of price-to-earnings ratio has a larger variation than that of price-to-book ratio. Explain the possible reasons for such a finding. (3 mark)