Problem 9-03

Currently, the dividend-payout ratio (D/E) for the aggregate market is 60 percent, the required return (k) is 10 percent, and the expected growth rate for dividends (g) is 4 percent. Round your answers to two decimal places.

1. Compute the current earnings multiplier.

   x

2. You expect the D/E payout ratio to decline to 45 percent, but you assume there will be no other changes. What will be the P/E?

   x

The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.

Problem 9-12

The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.

Assume:	$20	=	Price of a Stock Today
	8%	=	Expected Growth Rate of Dividends
	$0.90	=	Annual Dividend One Year Forward

Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model. Do not round intermediate calculations. Round your answer to two decimal places.

%

Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model. Do not round intermediate calculations. Round your answer to two decimal places.

%

Problem 9-04

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 11 years, you expect the dividend-payout ratio will be at its low of 50 percent and that long-term government bond rates will rise to 8 percent. Because investors are becoming less risk averse, the equity risk premium will decline to 3 percent. As a result, investors will require a 11 percent return, and the return on equity will be 14 percent.

1. What is the expected growth rate? Round your answer to one decimal place.

   %

2. What is your expectation of the market P/E ratio? Do not round intermediate calculations. Round your answer to two decimal places.

   x

3. What will be the value for the market index if the expectation is for earnings per share of $92? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $