Calculate the residual earnings growth rate

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Question - A stock index was equal to 1270 in early 2013. The stocks traded at 2.5 times book value. In 2012, the stocks in the index earned a weighted average return on their common equity of 18%. Use a required rate of return of 10% for this portfolio.

a) Calculate the residual earnings growth rate the market is forecasting for these stocks.

b) Suppose you forecast that a return on common equity of 18% will be sustained in the future. What is the growth rate in the net assets that you would then forecast at the current level of the index?

Reference no: EM132515492

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