(SOLVED) the dividend–payout ratio (D/E) for the aggregate market is 55 percent, the required return (k) is 9 percent, and the expected growth rate for dividends (g) is 4 percent.

Question

Currently, the dividend–payout ratio (D/E) for the aggregate market is 55 percent, the required
return (k) is 9 percent, and the expected growth rate for dividends (g) is 4 percent.

a) Compute the current earnings multiplier.

b) You expect the D/E payout ratio to decline to 40 percent, but you assume there will be
no other changes. What will be the P/E?

Expert Solution Preview

a) The earning multiplier model is basically the price to earning ratio which would be calculated as

= Dividend payout ratio/(required rate - growth rate)

= 0.55/(0.09 - 0.04)

= ...........