Question

6. Corporation A traded at a P/B (price-to-book) ratio of 0.5. Its most recent reported ROCE is 10% and its cost of equity is also about 10%. Which of the following is most likely to be true?

A. On average, the market expects future ROCEs to increase to above 10%;
B. On average, the market expects future ROCEs to decrease to below 10%;
C. On average, the market expects future ROCEs to maintain at 10%;
D On average, the market does not know what to expect.

Answer 1

D

Step-by-step explanation:

The P/B ratio of 0.5 suggests that the market values Corporation A's book value at half its market price. This could indicate that the market has uncertainties or lack of confidence in the future profitability and growth prospects of Corporation A. Since the P/B ratio is not an indicator of future ROCE expectations, it is reasonable to assume that the market does not have a clear expectation regarding future ROCEs.