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03 (a) Sinkpost Lid current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectation of the firm's long-term average ROCE (5 marks) (b) Given the information in Question 4 (a), what will be Sinkpost's stock price if the market revises its expectations of long-term average ROCE to 20 percent? (5 marks) (e) Analysts reassess Sinkpost's future performance as follows: growth in book value increases to 12 percent per year, but the ROCE of the incremental book value is only 15 percent. What is the impact on the market-to-book ratio (5 marks) (d) The Gong Tea Company plans to acquire Lau Lau Ice Cream Co. for $60 per share, a 50 percent premium over current market price. Lee Ho, the CFO of Gong Tea, argues that this valuation can easily be justified using a price-eamings analysis. "Gong Tea has a price-camings ratio of 15, and we expect that we will be able to generate long-term camings for Lau Lau loe Cream of 5 per share. This implies that Lau Lau Ice Cream is worth $75 to us, well above our $60 offer price." Do you agree with this analysis? What are Lee Ho's key assumptions! (10 marks) 03 (a) Sinkpost Lid current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectation of the firm's long-term average ROCE (5 marks) (b) Given the information in Question 4 (a), what will be Sinkpost's stock price if the market revises its expectations of long-term average ROCE to 20 percent? (5 marks) (e) Analysts reassess Sinkpost's future performance as follows: growth in book value increases to 12 percent per year, but the ROCE of the incremental book value is only 15 percent. What is the impact on the market-to-book ratio (5 marks) (d) The Gong Tea Company plans to acquire Lau Lau Ice Cream Co. for $60 per share, a 50 percent premium over current market price. Lee Ho, the CFO of Gong Tea, argues that this valuation can easily be justified using a price-eamings analysis. "Gong Tea has a price-camings ratio of 15, and we expect that we will be able to generate long-term camings for Lau Lau loe Cream of 5 per share. This implies that Lau Lau Ice Cream is worth $75 to us, well above our $60 offer price." Do you agree with this analysis? What are Lee Ho's key assumptions! (10 marks)

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