ANSWER

a)

usefulness of book rate of return

The primary advantage of using book value rate of return as a basis for a company's valuation is that there's little or no subjectivity involved in calculating the figure. When you buy an asset, its cost becomes the starting entry on the balance sheet for the value of that asset. Over time, the asset gets used up, and depreciation gradually reduces the balance-sheet value of the asset. Although depreciation methods are generally simpler than the actual drop in an asset's value over time, the approximation is close enough to give you a relatively accurate view of the current value of the asset in most cases.

Value investors like to refer to book value rate of return in searching for stocks trading at bargain prices. If a stock trades below book value rate of return, then investors typically see it as an opportunity to buy the company's assets at less than they're worth. The potential pitfall is that if the value of the assets on the balance sheet are artificially inflated, then a discount to book value is perfectly justified and doesn't represent a bargain stock price.

HOW DOES BOOK VALUE RATE OF RETURN RELATES TO RESIDUAL INCOME

In equity valuation, residual income represents an economic earnings stream and valuation method for estimating the intrinsic value of a company's common stock. The residual income valuation model values a company as the sum of book value and the present value of expected future residual income. Residual income attempts to measure economic profit, which is the profit remaining after the deduction of opportunity costs for all sources of capital.

Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.

b)

No.

this is not a reasonable expectation since current price is dyanamic in nature and current income is static in nature the relation between them cannot exist. price also discounts the future value of price therefore current income can not guide the price of share dominantly.

moreover this is not in consistent with M-M dividend irreleveance theory

Dividend irrelevance theory holds the belief that dividends don't have any effect on a company's stock price. A dividend is typically a cash payment made from a company's profits to its shareholders as a reward for investing in the company. The dividend irrelevance theory goes on to state that dividends can hurt a company's ability to be competitive in the long term since the money would be better off reinvested in the company to generate earnings.

The dividend irrelevance theory suggests that a company’s declaration and payment of dividends should have little to no impact on the stock price. If this theory holds true, it would mean that dividends do not add value to a company’s stock price.

The premise of the theory is that a company's ability to earn a profit and grow its business determines a company's market value and drives the stock price; not dividend payments. Those who believe in the dividend irrelevance theory argue that dividends don't offer any added benefit to investors and, in some cases, argue that dividend payments can hurt the company's financial health.