C2 - Nov. 2001 q.48

[LFC]

Hey ppl..had a question:

The after-tax earnings and diviendends of a company are expected to increase at a constant rate. The market capitalization rate is 15.5% and is expected to stay constant. Details of the company's financial statement for the yr 2000 are:

After-tax earnings 150
Dividends 45
Avg Book equity 1000

Calculate the expected divident yield.

My only question is: Is the market capitalization rate another name for the Re? SO this is different from the ROE which is 150/1000?

Thanks.

[Tomoyo]

From the finance textbook glossary:

Market capitalization rate = Expected return on a security.

[any_epsilon]

ROE is not market capitalization rate. ROE varies with each company(Net Income is different), while market capitalization rate is predicted by CAPM and is the same for similar risk projects.