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Assume that abnormal earnings are earned for perpetuity with growth g. Determine the theoretically correct...

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Question

Finance

Assume that abnormal earnings are earned for perpetuity with growth g. Determine the theoretically correct PB ratio for each of the following companies A and B

Firm

NOA

BVE

ROE

Cost of Equity

g

A

100

100

18%

15%

2%

B

100

100

11%

10%

4%

NOA is Net Operating assets and BVE is book value of equity

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