Fin550 fin560 4. Currently, the dividend-payout ratio (D/E) for the aggregate market is 60 percent, the required return (k) is 11 percent, and the expected growth rate for dividends (g) is 5 percent. a. Compute the current earnings multiplier. b. You expe

qweek_6_excel_homework_accounting.xlsx

P1.Q4

Dividend payout ratio (D/E)	60%	Answers
Required rate of return (k)	11%	a .	Compute the current earnings multiplier
Expected growth rate of dividends (q)	5%	P/E =Dividends payout (D/E) /(K-g)
Earnings multiplier =	10
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?
D/E decline to :	50%
P/E =Dividends payout (D/E) /(K-g)
New P/E =	8.33
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 percent. Compute the expected P/E.
Increase in rate of inflation	3%
Increase in growth rate	2%
New required return =	14.33%
New growth rate will be	7.00%
Expected P/E :	8.19
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.
Decrease in rate of inflation	3%
decrease in growth rate	1%
New required return	7.67%
New growth rate	4.00%
Expected P/E :	16.34877

From problem 6	Answers
Estimated EPS for 2013	$99.28	a.	Based on the three EPS and P/E estimates, compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013.
Optimistic EPS	$89.42
Persimistic EPS	$109.14	Pessimistic	Concensus	Optimistic
q=Risk premium(D/E +ROE)	0.038	0.0272	0.018
Pessimistic	Concensus	Optimistic	P/E =	5.80	5.35	4.89	Times
D/E	0.65	0.55	0.45	High	Concensus	Low
Norminal RFR	0.1	0.09	0.08
Risk premium	0.05	0.04	0.03
ROE	0.11	0.13	0.15
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. Assuming your required rate of return is equal to the consensus, how would you weight the S&P Industrials Index in your global portfolio?
S&P industrial index at the beginnning	2,050
Required rate of return (k)	15%	13%	11%
Pessimistic	Concensus	Optimistic
Required rate of return	15%	13%	11%
0.0585	0.0825	0.0385
7.6923076923	16.363636364	5.8295964126
2,050
Concensus	optimisitic	Pessimistic
-76.23%	-39.77%	-85.24%

Beginning FCFE	$80	Answers
rrr (k)	0.09	10.08%	a .	Assuming that the current value for the S&P Industrials Index is 2,050, would you underweight, overweight, or market weight the U.S. equity market?
Current s&p	2,050
Growth rate	Year	FCF	PV factor @10.09%	PV of FCF
Year	rate	1	$87.20	0.9174311927	$80.00
1-3:	9%	2	$95.05	0.8416799933	$80.00
4-6:	8%	3	$103.60	0.7721834801	$80.00
7 and beyond	7%	4	$111.89	0.7084252111	$79.27
Inflation increase	1%	5	$120.84	0.6499313863	$78.54
6	$130.51	0.5962673269	$77.82
7	6,982.24	0.5470342448	$3,819.52
Market value	$4,295.15
The current market value is overweighed
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
Year	FCF	PV factor @10.09%	PV of FCF
1	87.2	0.9083477155	79.2079207916
2	95.05	0.7494736781	71.2374731034
3	103.6	0.6807827034	70.5290880722
4	111.89	0.6807827034	76.1727766834
5	120.84	0.6183874134	74.7259350353
6	130.51	0.5617107942	73.308875751
7	4519.25	0.5617104608	2,538.51
Market value	2,998.00
The market value would decrease because the required rate of return would increase

Factors that determine an industry's intensity of competition
1 .	Bargaining power of suppliers
2 .	Threat of substitute products
3 .	Degree of competitive rivalry
4 .	Bargaining power of customers
5 .	Threat of new entrants to a market