As an analyst for Charlotte and Chelle Capital, you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been expanding for 9 years, you expect the dividend-payout ratio will be at its low of 40 percent and that long-term government bond rates will rise to 7 percent. Because investors are becoming less risk averse, the equity risk premium will decline to 3 percent. As a result, investors will require a 10 percent return, and the return on equity will be 12 percent.
a. What is the expected growth rate?
b. What is your expectation of the market P/E ratio?
c. What will be the value for the market index if the expectation is for earnings per share of $95?

  • CreatedDecember 17, 2014
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