Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number) *Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question 6. Suppose that the consensus
Suppose that you are confident that 10% is the required
What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number)
*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.
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