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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Price to Book ratio
Firm has EPS 11.04 in 2019 and DPS 6. Growth in earning and dividend expected to be 6% in long term. The ROE is expected 14%.
The beta is 0.8, the RFR is 6% and market premium is 4%.
Is this supposed to be a question? Because if it is then I have no idea what you are wanting!!
It’s a question, for Price to Book value?
Sorry! Missed to write it.
I tried but couldn’t solve it.
The provided answers are
1) 5.91
2) 0.50
3) 2.38
4) 0.83
I am puzzled where you found this question, because price to book value is a US term which is not asked in Paper FM (if it ever was then it would be defined for you in the question).
I assume that you are using a Revision Kit from one of the ACCA Approved Publishers. If this question is in the BPP Revision Kit then please tell me the number of the question because I am very surprised that they should have included it.
Also, I am surprised that whatever book you are using that it does not provide the answer and workings 🙂
Using CAPM, the shareholders required rate of return = 6 + (0.8 x 4) = 9.2%
Therefore, using the dividend valuation formula, the MV = (6 x 1.06) / (0.092 – 0.06) = 198.75
The nominal value of the shares is (11.04 x 1.06) / 0.14 = 83.59
So the MV / nominal value = 198.75 / 83.59 = 2.38
“The nominal value of the shares is (11.04 x 1.06) / 0.14 = 83.59”
Sir am curious to know which is this formula that you used to find nominal value per share?
I divided next years earnings by the return on equity – it is a ‘formula’ from Paper FA 🙂
However, again, this is not something that is asked for in ACCA exams.