Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry 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 these fundamental data.

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

Fundamental Factors Country A Country B Forecast growth in real GDP 5% 2%

Government bond yield 10% 6%

Equity risk premium 5% 4%

Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or Country B. P-69