Question #24
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
A firm's return on equity (ROE) is 15%, its required rate of return is 12%, and its expected growth rate is 7%. What is the firm's justified price to book value (P/
Answer Choices:
A. 1.60
B. based on these fundamentals?
C. 1.71.
Explanation
P0/B0 = (ROE – g) / (r – g) = (0.15 – 0.07) / (0.12 – 0.07) = 1.60