Question 2.2 Recall the graph for the price-earnings ratio from lecture slides (the Robert Shiller data) and assume that earnings are equal to dividends. Further assume that the real interest rate is constant at 7%. If the Gordon growth formulas is correct, what would the dividend growth rate have to be to explain the highest peak in the P/E ratio data that occurred around 2000? Similarly, what would the dividend growth rate have to be to explain the deepest through the the P/E data that occurred in early 1920s? Question 2.3 Are the numbers you obtained plausible? What else could justify the fluctuations in the P/E ratio? P/E ratio for the S&P 500 firms 50 2000 45 P/E ratio fluctuates quite a lot but it does return to its average level of 15 20 (mean reversion). In the long run, stock prices and earnings do grow at the same rate. 40 35 1929 30 25 20 15 w 10 2009 5 1982 0 1880 1900 1920 1940 1960 1980 2000 2020 Question 2.2 Recall the graph for the price-earnings ratio from lecture slides (the Robert Shiller data) and assume that earnings are equal to dividends. Further assume that the real interest rate is constant at 7%. If the Gordon growth formulas is correct, what would the dividend growth rate have to be to explain the highest peak in the P/E ratio data that occurred around 2000? Similarly, what would the dividend growth rate have to be to explain the deepest through the the P/E data that occurred in early 1920s? Question 2.3 Are the numbers you obtained plausible? What else could justify the fluctuations in the P/E ratio? P/E ratio for the S&P 500 firms 50 2000 45 P/E ratio fluctuates quite a lot but it does return to its average level of 15 20 (mean reversion). In the long run, stock prices and earnings do grow at the same rate. 40 35 1929 30 25 20 15 w 10 2009 5 1982 0 1880 1900 1920 1940 1960 1980 2000 2020