LOS g: Calculate an implied growth rate in residual income given the market price-to-book ratio and an estimate of the required rate of return on equity.

Q1. An investor is considering the purchase of Robust Econometrics, Inc., which has a price-to-book (P/B) value ratio of 4.50. Return on equity (ROE) is expected to be 14%, the current book value per share (BVPS) is Sf22.50, and the cost of equity is 12%. The growth rate implied by the current P/B ratio is closest to:

A)   12.57%.

B)   11.43%.

C)   8.00%.

Q2. An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/B) ratio of 6.00. Return on equity (ROE) is expected to be 13%, current book value per share is $13.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate?

A)   0.40%.

B)   11.00%.

C)   10.60%.

Q3. An investor is considering the purchase of Microscopics, which has a price to book value (P/B) ratio of 4.00. Return on equity (ROE) is expected to be 12%, current book value per share is $12.00, and the cost of equity is 10%. What growth rate is implied by the current P/B rate?

A)   9.33%.

B)   10.00%.

C)   0.67%.

Q4. An analyst is considering the purchase of Delphos Machinery, which has a price-to-book value (P/B) ratio of 8.00. Return on equity (ROE) is expected to be 14%, current book value per share is $12.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate?

A)   8.43%.

B)   10.57%.

C)   11.00%.

LOS g: Calculate an implied growth rate in residual income given the market price-to-book ratio and an estimate of the required rate of return on equity. fficeffice" />

Q1. An investor is considering the purchase of Robust Econometrics, Inc., which has a price-to-book (P/B) value ratio of 4.50. Return on equity (ROE) is expected to be 14%, the current book value per share (BVPS) is Sf22.50, and the cost of equity is 12%. The growth rate implied by the current P/B ratio is closest to:

A)   12.57%.

B)   11.43%.

C)   8.00%.

Correct answer is B)

The P/B ratio of 4.50 and the current BVPS of Sf22.50 imply a market price of Sf101.25(4.5 × 22.5). This implies a growth rate of:

Q2. An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/B) ratio of 6.00. Return on equity (ROE) is expected to be 13%, current book value per share is $13.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate?

A)   0.40%.

B)   11.00%.

C)   10.60%.

Correct answer is C)

The P/B ratio of 6.00 and the current book value per share of $13.00 imply a current market price of $78.00. This implies a growth rate of:

g = r – [{B₀(ROE – r)} / {V₀ – B₀}] = 0.11 – [{13.00(0.13 – 0.11)} / {78.00 – 13.00}] = 0.1060 = 10.60%.

Note that the reading in the curriculum does not provide this expression directly.

Q3. An investor is considering the purchase of Microscopics, which has a price to book value (P/B) ratio of 4.00. Return on equity (ROE) is expected to be 12%, current book value per share is $12.00, and the cost of equity is 10%. What growth rate is implied by the current P/B rate?

A)   9.33%.

B)   10.00%.

C)   0.67%.

Correct answer is A)

The P/B ratio of 4.00 and the current book value per share of $12.00 imply a current market price of $48.00. This implies a growth rate of:

g = r – [{B₀(ROE – r)} / {V₀ – B₀}] = 0.10 – [{12.00(0.12 – 0.10)} / {48.00 – 12.00}] = 0.0933 = 9.33%.

Note that the reading in the curriculum does not provide this expression directly.

Q4. An analyst is considering the purchase of Delphos Machinery, which has a price-to-book value (P/B) ratio of 8.00. Return on equity (ROE) is expected to be 14%, current book value per share is $12.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate?

A)   8.43%.

B)   10.57%.

C)   11.00%.

Correct answer is B)

The P/B ratio of 8.00 and the current book value per share of $12.00 imply a current market price of $96.00. This implies a growth rate of:

g = r ? [B₀(ROE ? r)] / (V₀ ? B₀) = 0.11 ? [12.00(0.14 ? 0.11)] / (96.00 ? 12.00) = 0.1057 = 10.57%.

(Note: the reading in the curriculum does not provide this expression directly.)