NCH, which markets cleaning chemicals, insecticides, and other products, paid dividends of $2.00 per share on earnings of $4.00 per share. The book value of equity per share was $40.00, and earnings are expected to grow 5 percent a year in the long term. The stock has a beta of 0.85, and sells for $60 per share. The Treasury bond rate is 7 percent.
a. Based on these inputs, estimate the price/book value ratio for NCH.
b. How much would the return on equity have to increase to justify the price/book value ratio at which NCH sells for currently?