Information indicates that a firm will earn a return on common equity

QUESTION

Information indicates that a firm will earn a return on common equity above its cost of equity capital in all years in the future, but its shares trade below book value. Those shares must be mispriced. True or false?
If each year the return on common equity rises it will mean that the profits of the company will rise (as ROE=> PAT/ total shareholders equity, hence rising ROE means rising earnings), so if the payout of the company remains same then dividend per year will increase. Again, market price of the share is computed as (Dividend for next year / cost of equity

dash; growth) so rising dividend will mean increase in the market price of the common equity shares. Now if the shares are traded below the book value level it clearly signifies that shares are mispriced. Thus the statement is True.

ANSWER:

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