Q 11 & 12 For the next two problems utilize the following data for the entire st
ID: 2655946 • Letter: Q
Question
Q 11 & 12
For the next two problems utilize the following data for the entire stock market: kRF 4.0 % P-E ratio- 25.0 9.0 % (S) What is the expected rate of returm for the stock market: k ? (a) (b) 9.0 % 10.0% (c) 11.0 % (d) 12.0% (e) 13.0% (9) Assuming equilibrium and the equilibrium condition, what is the market equity risk premium for the stock market: kM KRF? (a) (b) 9.0 % 10.0% (c) 11.0 % (d) 12.0% (e) 13.0% For the next three problems utilize the following data Assume that the value for the company's stock price is an equilibrium value (10) What is the earnings yield for the company? (a) 3.00% (b) 3.50% (c) 4.00% (d) 5.00% (e) 6.00% plied earnings growth (e) 12.6% ) Recall the equilibrium conditio what is the (c) 8.6% (d) 9.1 % (b) 6.6% (12) Utilize the data: { kRF_ 6.0% ; bi .60 ; kM-kRF - 11.0% } as before If you are now told that the earnings growth rate i what is the P-E ratio? ge (a) 33 1/3 (e) 15Explanation / Answer
11:
K=k Rf+Beta*(km-kRf)
=6%+ 0.6*11%
=12.6%
Price= E1/(k-g)
60 =2.1/(12.6%-g)
0.126-g= 2.1/60
g= 0.126- 2.1/60
=9.1%
12:
Price= E1/(k-g)
=2.1/(12.6%-7.6%)
= $42
P/E Ratio =Price/ EPS = 42/2.1
= 20
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