What should be the P-E ratio of the PharmaFarm Index

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Question - Assume the aggregate sales per share for the PharmaFarm Industry index is $6,500 during the current year. The following is regression estimate of corporate sales growth rate on GDP growth rate.

Sales growth rate = 0.02 + 1.5*(GDP Growth Rate)

Assume for the coming year, GDP growth rate is estimated to be 4% (or 0.04).

a) What is the forecasted sales per share of PharmaFarm industry index?

b) Assume the dividend payout ratio is 40% and the required rate of return on equities is 12%. What should be the P/E ratio of the PharmaFarm Index?

c) If the net profit margin of the aggregate index is 10%, what should be the estimated value of the index?

d) If the actual value of the index is $5,500, will you invest in the index or not? Explain.

Reference no: EM132969136

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