Emerging vs. developed equities V/B/E/S 12 month foward P/E ratio 30 - MSCI developed 11.5 MSCI emerging 9.6 25 20 15 VV Z 10 5 94 96 98 00 02 04 06 08 10 12 Source: Thomson Reuters Datastream Reuters graphic/Scott Barber 1/27/2012 9. The figure above shows data on price-earning ratios for developed and emerging economies. Using Gordon's growth model answer the following questions: a. Suppose that the rate of growth of dividends is larger for emerging economies. Based on the average values of the price-earning ratios, what do we know about the required rates of return? b. By 1994, the price-earning ratio was higher for emerging markets. In the following years, this relationship is clearly reversed. Provide an explanation in terms of changes in dividends growth rate and required rate of return