As an analyst you are estimating the P/E ratio using the DDM. Since the economy has...

Transcribed Image Text:

As an analyst you are estimating the P/E ratio using the DDM. Since the economy has slowed down for the last five years, you anticipate that dividend-payout ratio would be 55%. The rate of long-term govt. bonds is 6%. The risk premium is anticipated to be 3%. And the return on equity is forecasted to be 11%. And the equity risk premium is estimated to be 3%. a) What would be the growth rate, g? b) What do you expect the market P/E ratio to be? As an analyst you are estimating the P/E ratio using the DDM. Since the economy has slowed down for the last five years, you anticipate that dividend-payout ratio would be 55%. The rate of long-term govt. bonds is 6%. The risk premium is anticipated to be 3%. And the return on equity is forecasted to be 11%. And the equity risk premium is estimated to be 3%. a) What would be the growth rate, g? b) What do you expect the market P/E ratio to be?

Answer rating: 100% (QA)

Solution Calculation of growth rate Growth rateReturn on equity1divi... View the full answer