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1. Currently, the dividend-payout ratio (D/E) for...

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Question

1. Currently, the dividend-payout ratio (D/E) for the aggregate market is 60 percent, the re- quired return (k) is 11 percent, and the expected growth rate for dividends (g) is 5 percent. a. Compute the current earnings multiplier. b. You expect the D/E payout ratio to decline to 50 percent, but you assume there will be no other changes. What will be the P/E? c. Starting with the initial conditions, you expect the dividend-payout ratio to be constant, the rate of inflation to increase by 3 percent, and the growth rate to increase by 2 per- cent. Compute the expected P/E. d. Starting with the initial conditions, you expect the dividend-payout ratio to be constant, the rate of inflation to decline by 3 percent, and the growth rate to decline by 1 percent. Compute the expected P/E. 2. You are given the following estimated per share data related to the S&P Industrials Index for the year 2013: Sales $1,450.00 Depreciation 58.00 Interest expense 28.00 You are also given the following estimates related to the market earnings multiple: Pessimistic Consensus Optimistic D/E 0.65 0.55 0.45 Nominal RFR 0.10 0.09 0.08 Risk premium 0.05 0.04 0.03 ROE 0.11 0.13 0.15 a. Based on the three EPS and P/E estimates, compute the high, low, and consensus intrin- sic market value for the S&P Industrials Index in 2013. b. Assuming that the S&P Industrials Index at the beginning of the year was priced at 2,050, compute your estimated rate of return under the three scenarios from Part a. As- suming your required rate of return is equal to the consensus, how would you weight the S&P Industrials Index in your global portfolio? 3. You are analyzing the U.S. equity market based upon the S&P Industrials Index and using the present value of free cash flow to equity technique. Your inputs are as follows: Beginning FCFE: $80 k = 0.09 Growth Rate: Year 1?3: 9% 4?6: 8% 7 and beyond 7% b. Assume that there is a 1 percent increase in the rate of inflation?what would be the market?s value, and how would you weight the U.S. market? State your assumptions.

 

Paper#10065 | Written in 18-Jul-2015

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