If a firm’s return on equity (ROE) is greater than the rate of return demanded by investors ®, which of the following statements is TRUE? There is: A) a high franchise P/E value. B) potential franchise value. C) negative franchise value.
Franchise P/E = 1/r-1/ROE or (ROE-R)/r.ROE so if ROE > r then potential Franchise value.
dude I haven’t seen a single incorrect answer from you. It seems like you have been studying for level II since 2007 August after L1.
Franchise P/E = Tangible P/E + FF*G ROE > r means 2nd component has +ve value (potential) So B?
B you wouldn’t know what is a “high” franchise value unless there was something to compare it to, hence A is wrong.
swaptiongamma Wrote: ------------------------------------------------------- > Franchise P/E = Tangible P/E + FF*G > > ROE > r means 2nd component has +ve value > (potential) > > So B? sorry… somehow typed it wrong. Intrinsic P/E = Tangible P/E + Franchise P/E Intrinsic P/E = i/r + (i/r - 1/ROE)*(g/(r-g))