You have been asked to analyze LongLife Insurance company, a firm in stable growth, with earnings expected to grow 4% in the long term. The firm is trading at a multiple of 1.4 times book value and has a cost of equity of 11%.

a. If the market is pricing the stock correctly, estimate the return on equity that LongLife is expected to earn in perpetuity.

b. If the regulatory authorities constrain LongLife to earn a return on equity equal to its cost of equity, what would you expect the price-to-book ratio to be?