Accounting-1 - Solution We have P/E = 11.1 ROE = 13.5 and g...

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Chapter 11 Question 1 In 2009, the median price-to-earnings ratio for the S&P 500 was 11.1. If the long-run return on equity is 13.5 percent and  the long-run growth in GDP is expected to be 6.7 precent (3.5 percent real growth and 3.2 percent inflation), what is the  real cost of equity implied by the equity-denominated key value driver formula?
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Unformatted text preview: Solution: We have P/E = 11.1, ROE = 13.5% and g = 6.7% The real cost of equity, ke is Ke = E/P (1 – g/ROE) + g = 1/11.1 (1 – 0.067/0.135) + 0.067 = 0.0454 + 0.067 = 0.1124 = 11.24%...
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