a. A share traded at $26 at the end of 2012 with a price-to-book ratio of 2.0.

Question:

a. A share traded at $26 at the end of 2012 with a price-to-book ratio of 2.0. Analysts were forecasting earnings per share of $2.60 for 2013. If you expect no growth in residual earnings after 2013, what is the expected return from buying this stock?

b. A firm with a book value of $27.40 per share at the end of 2012 is expected to earn an EPS of $4.11 in 2013. If you expect subsequent growth in residual earnings to be at a rate of 4 percent per year, what is the expected return from buying this stock at a market price of $54 per share?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...