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Question 3 A firm with a book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common
Question 3 A firm with a book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common equity of 15 percent per year indefinitely in the future. Its cost of equity capital is 10 percent. a. Calculate the intrinsic price-to-book ratio. b. Suppose this firm announced that it was reducing its payout to 50 percent of earnings in the future. How would this affect your calculation of the price-to-book ratio? Consider two scenarios: 1). the dividend that is not paid out is invested at the same ROCE of 15%;2 ). the dividend that is not paid out is invested at the required rate of return 10%. Compare your valuation result in these two scenarios and explain why they are the same or different
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