Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry y and market data to help in his analysis:

Forecast industry earnings retention rate ..........40%

Forecast industry return on equity ...........25%

Industry beta .....................1.2

Government bond yield ................6%

Equity risk premium .................5%

a. Compute the price-to-earnings (P0/E1) ratio for the industry based on this fundamental data.

b. Jones wants to analyze how fundamental P/E ratios might differ among countries. He gathered the following economic and market data:

Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for CountryB.

Transcribed Image Text:

Fundamental Factors Forecast growth in real GDP Government bond yield Equity risk premium Country A 5% 10% 5% Country B 2010 690 4%