Exhibit 12.8 Use the Information Below for the Following Problem(S)

question 42

Multiple Choice

Exhibit 12.8
Use the Information Below for the Following Problem(S)
As an economist for a research firm you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55%. Long-term government bond rates are at 6% and the equity risk premium is estimated to be 3%. Return on equity (ROE) is estimated to be 11%.
-Refer to Exhibit 12.8.What is the expected growth rate?

• A) 3.00%
• B) 3.92%
• C) 4.95%
• D) 5.27%
• E) 6.05%

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Definitions:

Liquidity Ratio

Measures a company's ability to meet its short-term obligations using its most liquid assets.

Profit Margin

A profitability ratio calculated by dividing net income by revenue, expressing the percentage of revenue that translates into net income.

Collection Policy

The procedures and guidelines used by a company to manage and collect accounts receivable.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.