1  A company has a book value of equity of $248 million, an expected ROCE of 15% and a cost of equity capital of 14

1 

Dividend D1 = Book value of equity * ROCE

= $ 248 million * 15%

= $ 37.2 million

Market value of equity = D1 / (ke-g)

= $ 37.2 / ( 0.141-0.03)

= $ 37.2 / 0.111

= $ 335.135 million

Note :

Ke = Cost of equity i.e., 14.1%

g = Growth rate i.e., 3%

2 

Intrinsic value of share price = Present value of all cash flows arising from the stock

Present value of all cash flows arising from the stock = Present value of next five year's residual earnings + Present value of residual earnings beyond five years

Intrinsic price = $1.22 + $5.57

Intrinsic price = $6.79

So, Intrinsic price = $6.79

Where as, Book value per share = $6.47

Intrinsic price - to - book ratio = $6.79 / $6.47

Intrinsic price - to - book ratio = 1.04946 or

Intrinsic price - to - book ratio = 1.05 (rounded off to '2' decimals)

3 

ANSWER

WHO IS AN AUDITOR?

In simple terms, an auditor is an individual who is appointed to inspect the books of accounts of a company, the validity and accuracy of the transactions contained therein. He also forms an opinion on the overall view of the financial statements, whether the statements depict a true and fair view of the entity’s financial position.

Since the Industrial Revolution in 18th century, businessmen started forming Joint Stock Companies to do business. In most situations, people who managed the company (called management or directors) were separate from those who owned the company (called shareholders). So, Stewardship is the practice of managing other person’s property. Management and Directors have role of stewardship i.e. they wisely look after the assets of the company on behalf of shareholders.

To judge the performance of management and directors, shareholders asked them to prepare and present them financial statements. Soon after, it was recognized that financial statements prepared by management/directors presented “best-view” of business instead of “true-and-fair-view” due to some Incentive (e.g. bonus) or Pressure (e.g. fear of removal) faced by management. Thus credibility of financial statements was questioned.

ARGUMENT FOR AUDITORS

To enhance the credibility/ confidence/ assurance on these financial statements, an expert person (called assurance provider or auditor) was hired by shareholders to verify financial statements. This person (i.e. auditor) is independent of both management and shareholders.

ARGUMENT AGAINST AUDITORS

even after the audit of the financial staements company can still manipulate accounts with auditors .