# HW03 - above the average high S&P 500 P/E ratio for the...

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Bus291 Homework 3 1. If R f = 6%, b = 1.2, and the ERP = 6.5%, compute K e (the required rate of return). K e = R f + b ( K m – R f ) R f = 6%, b = 1.2, ( K m – R f ) = 6.5% K e = 6% + 1.2 (6.5%) = 6% + 7.8% = 13.8% 4. Assume D 1 = \$1.80, K e = 13%, and g = 9%. Using formula 7-5 on page 172 for the constant growth dividend valuation model, compute P 0 . P 0 = D 1 / (K e – g) D 1 = \$1.80, K e = 13% = 0.13, g = 9% = 0.09 P 0 = \$1.80 / ( 0.13 – 0.09) = \$1.80 / 0.04 = \$45.00 13. Refer to Table 7-4 on page 183. Assume that because of unusually bright long-term prospects, analysts determine that Johnson & Johnson’s P/E ratio in 2004 should be 20%

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Unformatted text preview: above the average high S&P 500 P/E ratio for the last 10 years. (Carry your calculation of the P/E ratio two places to the right of the decimal point in this problem.) What would the stock price be, based on estimated earnings per share of \$3.00 (for 2004)? Average high S&P 500 P/E ratio for last 10 years = 23.70 20% above 23.70 = 1.2 * 23.70 = 28.44 Price = EPS 2004 * P/E 10-year high predicted Price = \$3.00 * 28.44 = \$85.32...
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## This note was uploaded on 05/10/2010 for the course BUS 261 taught by Professor Shi during the Spring '10 term at Diablo Valley College.

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HW03 - above the average high S&P 500 P/E ratio for the...

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