Question: Residual Earnings Valuation and Return on Common Equity (Medium) A firm with a book value of$15.60 per share and 100 percent dividend payout is expected to have a return on common equity of 15 percent per year indefinitely in the future. Its cost of equity capital is 10 percent.
a. Calculate the intrinsic price-to-book ratio.
b. Suppose this firm announced that it was reducing its payout to 50 percent of earnings in the future. How would this affect your calculation of the price-to-book ratio?