Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanci's earnings and dividends will grow at a constant rate of 13%.

a. Calculate the P/E ratio based on information in Tables 18A and 18B and on Johnson's assumptions for Sundanci.

b. Identify, within the context of the constant dividend growth model, how each of the following factors would affect the P/E ratio.

• Risk (beta) of Sundanci.

• Estimated growth rate of earnings and dividends.

• Market risk premium.

Table18 A

Table 18B
Required rate of return on equity .................14%
Growth rate of industry ............................13%
Industry P/E ratio .....................................26

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Income Statement Revenue Depreciation Other operating costs Income before taxes Taxes Net income Dividends Earnings per share Dividend per share Common shares outstanding (millions) Balance Sheet Current assets Net property, plant and equipment 2010 2011 $474 20 368 86 26 S 598 23 Aeit 115 35 18 $0.714 $0.214 84.0 24 $0.952 $0.286 84.0 2010 2011 201 474 675 57 S326 사U3 815 141 Total assets Current liabilities Long-term debt Total liabilities 57 618 675 34 141 674 815 38 Shareholders' equity Total liabilities and equity Capital expenditures