USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 131

Multiple Choice

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. Because 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 9.4. 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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Definitions:

Vertical Equity

A principle in taxation where taxpayers with a greater ability to pay, typically measured by income or wealth, contribute more in taxes.

Negative Externalities

Costs suffered by a third party as a result of an economic transaction that they are not directly involved in.

Taxes

Obligatory charges imposed by the government on the earnings of employees, profits of companies, or included in the prices of various goods, services, and transactions.

Income Tax

A tax levied by governments on individuals or entities based on their income or profits.