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3a. Manufactured Earnings is a "darling" of Wall Street analysts. Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectation of the firm's long-term average ROE?
b. Given the information in part a, what will be Manufactured Earnings' stock price if the market revises its expectations of long-term average ROE to 20 percent?
c. Analysts reassess Manufactured Earnings' future performance as follows: growth in book value increases to 12 percent per year, but the ROE of the incremental book value is only 15 percent. What is the impact on the market-to-book ratio?

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Accounting Basics, Accounting

Category:- Accounting Basics
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