USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 98

Multiple Choice

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 percent. Long-term government bond rates are at 6 percent, and the equity risk premium is estimated to be 3 percent. Return on equity (ROE) is estimated to be 11 percent.
-Refer to Exhibit 9.8. 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:

Specific

Clearly defined or identified; precise and unambiguous.

Challenging Goals

Objectives that are ambitious and require substantial effort and planning to achieve, often motivating individuals or teams to improve their performance.

Equity Theory

A theory of motivation that suggests individuals are motivated by their perception of fairness in the distribution of rewards and resources.

Inputs

Anything that people give up, offer, or trade to their organization in exchange for outcomes.