Reference no: EM132523801

An equity analyst needs to calculate the justified forward P/B ratio for a company with the following characteristics:

Profit margin = 4%

Total asset turnover = 1.6

Equity multiplier = 2

Dividend growth rate = 2%

Cost of equity = 7%

The formula for the justified forward P/B ratio is:

P/B = ROE / (r - g)

The return on equity (ROE) can be calculated using the DuPont model:

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier

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1. What is the ROE?

2. If the analyst assumes a profit margin of 3% instead of 4%, what is the new justified forward P/B ratio?

3. What is the justified forward P/B ratio?