2 The following table provides summary data for Target on Ma

2. The following table provides summary data for Target on May 2, 2014, per finance.yahoo.com (in billions). Analysts often use the observed PB ratio to infer market expectations regarding a company’s future performance based on assumptions. Assuming that the market’s expectation of Target’s future ROE is consistent with its past performance and its discount rate is expected to be 7.5%, compute Target’s implied future growth rate.

	Target
	Market value of equity	$39.30
	Book Value of Equity	$16.49
	ROE	11.46%

2. The following table provides summary data for Target on May 2, 2014, per finance.yahoo.com (in billions). Analysts often use the observed PB ratio to infer market expectations regarding a company’s future performance based on assumptions. Assuming that the market’s expectation of Target’s future ROE is consistent with its past performance and its discount rate is expected to be 7.5%, compute Target’s implied future growth rate.

	Target
	Market value of equity	$39.30
	Book Value of Equity	$16.49
	ROE	11.46%

Solution:

Market value of equity = $39.30

Book value of equity = $16.49

ROE = 11.46%

PB ratio = $39.30 / $16.49 = 2.38326

Price book difference = 2.38326 -1 = 1..38326

Let growth rate = g

Discount rate = 7.5%

Implied parameter:

Discount rate = [ROE + (PB difference * g)] / (1 + PB difference)

0.075 = [0.1146 + (1.38326 * g)] / (1+1.38326)

0.17874 = 0.1146 + 1.38326 g

g = 4.64%