9. Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the
Question:
9. 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 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:
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 higher for Country B.
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