Compute the current earnings multiplier

Assignment Help Project Management

Reference no: EM13495176 , Length: 10

1. Currently, the dividend=payout ratio (D/E) for the aggregate market is 60 percent, the required return (k) is 11 percent, and the expected growth rate for dividends (g) is 5 percent.

a. Compute the current earnings multiplier

b. You expect the D/E payout ratio to decline to 50 percent, but you assume there will be no other changes. What will be the P/E?

c. Starting with the initial conditions, you expect the dividend-payout ratio to be constant. The rate of inflation to increase by 3 percent and the growth rate to increase by 2 percent. Compute the expected P/E.

d. Starting with the initial conditions, you expect the dividend-payout ratio to be constant, the rate of inflation to decline by 3 percent, and the growth rate to decline by 1 percent. Compute the expected P/E.

2. Given the three EPS estimates in Problem 6, you are also given the following estimates related to the market earnings multiple:

Pessimistic Consensus Optimistic

D/E 0.65 0.55 0.45

Nominal RFR 0.10 0.09 0.08

Risk premium 0.05 0.04 0.03

ROE 0.11 0.13 0.15

a. Based on the three EPS and P/E estimates, compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013.

b. Assuming that the S&P Industrials Index at the beginning of the year was priced at 2.050, compute your estimated rate of return under three scenarios from Part a. Assuming your required rate of return is equal to the consensus, how would you weigh the S&P Industrials Index in your global portfolio?

3. You are analyzing the U.S. equity market based upon the S&P Industrials Index and using the present value of free cash flow to equity technique. Your inputs are as follows:

Beginning FCFE: $80

K = 0.09

Growth Rate:

Year 1-3: 9%

4-6: 8%

7 and beyond: 7%

a. Assuming that the current value for the S&P Industrials Index is 2,050, would you underweight, overweight, or market weight the U.S. equity market?

b. Assume that there is a 1 percent increase in the rate of inflation - what would be the market's value, and how would you weigh the U.S. market? State your assumptions.

Reference no: EM13495176

Questions Cloud

Compute the temperature of the filament : A 100 W light bulb has a resistance of about 12 ohms when cold (20 degrees C) and 140 ohms when hot. Estimate the temperature of the filament

Analyze and discuss the different components of growth : Evaluate your industry in terms of the five factors that determine an industry's intensity of competition. Based on this analysis, what are your expectations about the industry's profitability in the short run (1 or 2 years) and the long run (5 to..

Explain hydrogen bonding will not occur in molecules : Hydrogen bonding will not occur in molecules that contain bonds between hydrogen and a] bromide b] fluorine c] nitrogen d] oxygen

Calculate the radius a of the iron core : Consider a simple model for the interior of the Earth: there is a spherical iron core with constant mass density ?0 and radius a; outside the core is "rock" with constant density ?1. Calculate the radius a of the iron core

Compute the current earnings multiplier : Compute the current earnings multiplier and compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013.

Explain the molality of a solution prepared by dissolving : What is the molality of a solution prepared by dissolving 40.0g of glucose (C6H12O6) in 4.00kg of water?

Determine by how much is the string stretched : A 100 cm long, 1.2 mm diameter steel guitar string must be tightened to a tension of 1700 N by turning the tuning screws. By how much is the string stretched

What would you estimate as itsi dividend growth rate : The Shamrock Dogfood Company (SDC) has consistently paid out 40 percent of its earnings in dividends. The company's return on equity is 16 percent. What would you estimate as itsi dividend growth rate?

Explain the solubility of ammonium chloride of solute : The solubility of ammonium chloride at 70C is 60g of solute per 100g of water. What solution would be saturated at 70C

User Account

All Pages