A share trades at a price-to-book ratio of 0.7. An analyst who forecasts an ROCE of 12 percent each year in the future, and sets

Question

dlinn [17]

3 years ago

12

A share trades at a price-to-book ratio of 0.7. An analyst who forecasts an ROCE of 12 percent each year in the future, and sets

the required equity return at 10 percent, recommends a hold position. Does his recommendation agree with his forecast

Business

1 answer:

Julli [10] · Answer 1 · 2022-07-27T04:38:01+03:00

Answer:

It does not agree.

Explanation:

The company expects to earn ROCE higher than the required rate of return. If this is to be achieved, the company must trade at a premium value in the share market. But as the current price-to-book ratio indicated that the market value is lower than the book value, this indicate that it is a Buy position as the share is undervalued. Therefore, it does not agree with the company's recommendation.