Question
Use the following information for the next 5 questions. You are using an index to help you determine the market risk premium. The index is
Use the following information for the next 5 questions. You are using an index to help you determine the market risk premium. The index is expected to pay dividends of $8 and is currently traded at $200. The current yield on 5-year TIPS is 3.2%, and on 5-year Treasury notes is 5.7%. Labor productivity is expected to grow by 1.8%, and labor supply by 1.7%. Since you believe the index is under- valued, you expect the average PE will increase by 3%. Answer the following questions
- What is expected annual inflation over the next 5 years?
- What is the expected annual growth in real Earnings Per Share for the index?
- What is the expected annual growth in nominal Earnings Per Share for the index?
- What is the market risk premium?
- Assuming a firm has a beta of 1.5, what is the risk premium on the firms equity?
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Introduction to Corporate Finance What Companies Do
Authors: John Graham, Scott Smart
3rd edition
978-1111222284
