First Safe Interstate Bank is a small, regional bank that is trading at a price to book (equity) ratio of 1.50. The bank is in stable growth, with earnings and dividends expected to grow 3% a year in perpetuity. The stock has a beta of 1, the risk-free rate is 5% and the equity risk premium is 4%. a. Assuming that the market has priced this stock correctly, estimate the expected return on equity for the bank.

Answer rating: 100% (QA)

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