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

question 38

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 your expectation of the market P/E ratio?

• A) 9.17
• B) 11.11
• C) 13.58
• D) 18.33
• E) 21.42

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Definitions:

Financial Plan

A comprehensive evaluation of an individual's or organization's current and future financial state by using known variables to predict future cash flows, asset values, and withdrawal plans.

Capital Budgeting Decisions

The process by which a business evaluates and selects long-term investments that are worth more than their cost, considering their potential to generate future profits.

Interest Rates

The cost of borrowing money or the return for investing money, typically expressed as a percentage of the principal amount per annum.

Investment Proposals

Proposals put forward for investing capital in projects or securities, aiming to generate returns.