Question: Reverse Engineering Growth Rates (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. Your required return for equity is 10 percent. What is the growth rate for residual earnings that the market expects beyond 2013?
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. Your required return for investing in the shares of this firm is 9 percent. What is the expected growth rate for residual earnings after 2013 that is implied by a market price of $54?