Question: Reverse Engineering Expected Returns (Easy)
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 of2012 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?