price-to-earnings ratios

Business & Finance
Tutor: None Selected Time limit: 1 Day

(A)

forecast industry earnings retention rate= 40% 
forecast industry return on equity= 25% 
industry beta =1.2 
government bond yield= 6% 
equity risk premium =5% 

compute the price-to-earnings ratio for the industry based on this fundamental data.

Mar 4th, 2015

P0/E1=Payout ratio/(r-g)

Gind= ROE x retention rate=0.25*0.40=0.10

Rind=government bond yield+(industry beta * equity risk premium

=0.06+(1.2*0.05)=0.12

Therefor

P0/E1=0.60/(0.12-0.10)=30.0


Mar 4th, 2015

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