Question: Valuing Dividends or Return on Equity: General Motors Corp (Easy) In April 2005, General Motors traded at $28 per share on book value of $49 per share. Analysts were estimating that GM would earn 69 cents per share for the year ending December 2005 . The firm was paying an annual dividend at the time of $2.00 per share.
a. Calculate the price-to-book ratio (P/B) and the return on common equity (ROCE) that analysts were forecasting for 2005.
b. Is the P/B ratio justified by the forecasted ROCE?
c. An analyst trumpeted the high dividend yield as a reason to buy the stock. (Dividend yield is dividend/price.) "A dividend yield of over 7 percent is too juicy to pass up," he claimed. Would you rather focus on the ROCE or on the dividend yield?