Question: Intergalactic Software Company s stock has a market price of 20

Intergalactic Software Company’s stock has a market price of $20 per share and a book value of $12 per share. If its cost of equity capital is 15% and its book value is expected to grow at 5% per year indefinitely, what is the market’s assessment of its steady state return on equity?
If the stock price increases to $35 and the market does not expect the firm’s growth rate to change, what is the revised steady state ROE?
If instead the price increase was due to an increase in the market’s assessments about long-term book value growth rather than long-term ROE, what would the price revision imply for the steady state growth rate?

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  • CreatedFebruary 11, 2015
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