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The P / E ratio for the S&P 5 0 0 describes the value of the index divided by the earnings of the company in

The P/E ratio for the S&P 500 describes the value of the index divided by the earnings of the company in
the index, weighted according to market capitalization. The P/E ratio changes over time for two reasons:
Multiple Expansion: Investors are willing to pay a higher price for the same level of earnings.
Earnings Growth: Firms increase their earnings by reinvesting into and growing their business.
Find below a table of the price levels and earnings per share of the S&P 500 index.
a) For each year, compute the earnings growth rate, i.e., the change in EPS year over year.
b) For each year, compute the P/E ratio of the S&P 500 index.
c) Attribute the change in index from one year to another to multiple expansion and earnings growth.
Help: If E0=10,E1=12,P0=120,P1=156, then earnings growth is E1E0-1=20%. If
Name:
there was no multiple expansion, then the value of the index should go up by 20%. However, the
index went up by P1E1-1=30%. This means that 10% of the increase in index level can be
attributed to multiple expansion. We can check: The PE ratio in year 0 is P0E0=12 and the PE
ratio in year 1 is P1E1=13, which is bigger than in year 0
Note that earnings growth can be negative, and also multiples can shrink from year to year.
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