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Exhibit 9.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM As an economist for a research firm, you are forecasting the market P/E ratio using
Exhibit 9.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM As an economist for a research firm, you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55 percent. Long-term government bond rates are at 6 percent, and the equity risk premium is estimated to be 3 percent. Return on equity (ROE) is estimated to be 11 percent. Refer to Exhibit 9.8. What is your expectation of the market P/E ratio? a. 21.42 b. 13.58 c. 9.17 d. 18.33 e. 11.11
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