1. Assume the Moody’s A-rated corporate bond yield is 6.49 percent and the forecast for long-term earnings growth is 11.95 percent. Determine the Yardeni model estimate of the fair value earnings yield assuming d50.05 and d50.10. Are equities overvalued or undervalued if the S&P 500 earnings yield is 5.5 percent?

2. Assume the Moody’s A-rated corporate bond yield is 6.32 percent and the forecast for long-term earnings growth is 11.5 percent. Determine the Yardeni model estimate of the fair value price–earnings (P/E) ratio assuming d50.10. When would equities be undervalued? When would equities be overvalued?

3. A. Indicate the directional relationship predicted by the Yardeni model between changes in y_B, LTEG, and d and changes in the earnings yield.

B. Indicate the directional relationship predicted by the Yardeni model between changes in y_B, LTEG, and d and changes in the P/E ratio.