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On March 11, 1994, the New York Stock Exchange Composite was trading at 16.9 times earnings, and the average dividend payout ratio across stocks on

On March 11, 1994, the New York Stock Exchange Composite was trading at 16.9 times earnings, and the average dividend payout ratio across stocks on the exchange was 42.25%. The risk free rate on March 11, 1994, was 6.95%, and the expected market risk premium was 5%. The economy was expected to grow 6% a year, in nominal terms, in the long term.

(a) Based upon these inputs, estimate the justified trailing P/E ratio for the exchange.

(b) What growth rate in dividends (or earnings) would justify the trailing P/E ratio of 16.9 on March 11, 1994?

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