A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's ________.
A) earnings yield is above the industry average
B) P/E ratio is above the industry average
C) dividend payout ratio is too high
D) interest burden must be below the industry average

Question

Quizplus · Accepted Answer

If the firm's ROE is equal to the industry average, but its price-to-book ratio is below the industry average, this indicates that investors are willing to pay less for each unit of equity in the firm. This could be because the firm's earnings yield is higher than the industry average, meaning that investors are willing to accept a lower price-to-book ratio in exchange for a higher return on their investment. Therefore, choice A is the best answer. The other choices do not necessarily follow from the information given.

A Firm Has an ROE Equal to the Industry Average