Alexas Corporation reports the following:
$\begin{array}{|l|l|}
\hline
&\mathbf{2 0 0 5}\
\hline \text { Earnings per share } & \$ 1.80 \
\hline \text { Dividends per share } & \$ 0.72\
\hline \text { Book Value per share-end of year } & \$8.62\
\hline
\end{array}$
-If Price to book value at the end of 2005 equals 1.00, and return on beginning of year equity is expected to remain constant, then cost of equity (to nearest percent) equals:

Question

Alexas Corporation reports the following:
 $\begin{array}{|l|l|}
\hline
&\mathbf{2 0 0 5}\
\hline \text { Earnings per share } & \$ 1.80 \
\hline \text { Dividends per share } &  \$ 0.72\
\hline \text { Book Value per share-end of year } &  \$8.62\
\hline
\end{array}$
-If Price to book value at the end of 2005 equals 1.00, and return on beginning of year equity is expected to remain constant, then cost of equity (to nearest percent) equals:

Quizplus · Accepted Answer

Price to book value = Price per share / Book value per share
Given Price to book value = 1
Therefore, Price per share = Book value per share = $8.62
Given Dividend per share = $0.72
Therefore, Retention ratio = (Earnings per share - Dividend per share) / Earnings per share
Retention ratio = (1.80 - 0.72) / 1.80 = 0.6
Return on equity = Retention ratio x Return on equity + (1 - Retention ratio) x Return on assets
Assuming return on assets to be constant and equal to return on equity,
Return on equity = 0.6 x Return on equity + 0.4 x Return on equity
Return on equity = 24%
Cost of equity = Return on equity
Cost of equity = 24% (to the nearest percent)

Alexas Corporation Reports the Following -If Price to Book Value at the End of 2005