Suppose research has shown that "common stocks", as measured by the Standard & Poor's 500, have had an average cash flow payout ratio of 35%. We forecast the average cash flow payout ratio will continue at 35% and that cash flows will grow by an average of 3.50% annually over the long term.  With long-term Treasury bond rates yielding 1.70%, we decide a "fair" rate of return on equities is 5.50%.  The PE Ratio on the S&P 500 should be approximately:   3.89.                   d. 17.50. 5.00.                   e. 23.72. 11.86.                  f. 40.00.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Topic Video
Question

8 - Suppose research has shown that "common stocks", as measured by the Standard & Poor's 500, have had an average cash flow payout ratio of 35%. We forecast the average cash flow payout ratio will continue at 35% and that cash flows will grow by an average of 3.50% annually over the long term.  With long-term Treasury bond rates yielding 1.70%, we decide a "fair" rate of return on equities is 5.50%.  The PE Ratio on the S&P 500 should be approximately:

 

  1. 3.89.                   d. 17.50.
  2. 5.00.                   e. 23.72.
  3. 11.86.                  f. 40.00.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Knowledge Booster
Stock Valuation
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education