Analysts believe that Manufactured Earnings is a “darling” of Wall Street analysts. Its current market price is $27 per share, and its book value is $11 per share. Analysts forecast that the firm’s book value will grow by 12.5 percent per year indefinitely, and the cost of equity is 17percent. Given these facts, what is the market’s expectation of the firm’s long-term average ROE?

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 18MC
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Analysts believe that Manufactured Earnings is a “darling” of Wall Street analysts. Its current 
market price is $27 per share, and its book value is $11 per share. Analysts forecast that the 
firm’s book value will grow by 12.5 percent per year indefinitely, and the cost of equity is 17
percent. Given these facts, what is the market’s expectation of the firm’s long-term average 
ROE?

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