Exhibit 12.4 Use the Information Below for the Following Problem(S)

question 70

Multiple Choice

Exhibit 12.4
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent.
-Refer to Exhibit 12.4.What is your expectation of the market P/E ratio?

• A) 5.42
• B) 7.14
• C) 6.63
• D) 6.25
• E) 5.11

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