Question: A firm with a book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common equity of

A firm with a book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common equity of 15percent per year indefinitely in the future. Its cost of equity capital is 10 percent.

a. Calculate the intrinsic price-to-book ratio.

b. Suppose this firm announced that it was reducing its payout to 50 percent of earnings in the future. How would this affect your calculation of the price-to-book ratio?

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