The MSCI World is a portfolio consisting of 1,654 companies, weighted by their (free float-adjusted) value. It

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Question:

The MSCI World is a portfolio consisting of 1,654 companies, weighted by their (free float-adjusted) value. It is often taken as a measure of the World stock market as a whole. This question examines the assumptions on growth implicit in the valuation of the MSCI World. On December 30th, 2016, the dividend yield (the ratio of expected dividends next year to price today) of the MSCI World is 0.0248. The price-earnings ratio (ratio of price today to expected earnings next year) is 16.27. The price of one share of the MSCI World is $1,783. Assume the required rate of return for the MSCI World is 12%. (All sub-questions are equally weighted).

a. Determine the expected earnings per share next year (EPSl) and the plowback ratio for the MSCI World.
b. Assume that plowback and the return on equity for the MSCI World will remain the same in perpetuity. What must the return on equity (ROE) be to justify the price of $$1,783per share?

c. What does this return on equity imply about expected growth in earnings and dividends?
d. What is the net present value of growth opportunities (NPVGO) implicit in the price of the 74.52? Comment on your results.