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Book rate of return (the ratio of net income to book value of equity) has many uses in financial analysis and is often used as a measure of return on the (book value) of investment

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1. Book rate of return (the ratio of net income to book value of equity) has many uses in financial analysis and is often used as a measure of return on the (book value) of investment. Why is this measure useful? How is it related to the idea of residual income? (3 points)

2. Fisher Black proposes that the purpose of accounting should be to create income numbers such that a constant ratio of current income to current market price is maintained. Is this a reasonable expectation? Why or why not?                                   (3 points)

(Hint: Check if such a scheme will be consistent with the M-M dividend irrelevancy)