Suppose the Price/Earnings Ratio for the S&P 500 is 22 and the dividend payout ratio of the S&P
500 is 45%. The future growth rate of dividends is expected to be 4.80%. (USE EXCEL AND SHOW ALL FORMULAS)
a. Compute the expected return of the Market.
b. Use Goal Seek or Solver to determine the dividend growth rate that would yield an
expected Market return of 8%.
On Goal Seek please identify the..
i. Set Objective (Cell)
ii. To Value
iii. By Changing Variables Cell
iv. Subject to (if used
a: Expected return = 6.85%
b: Growth rate = 5.95%
Workings
P/E Ratio | 22 | |
Dividend payout ratio | 45% | |
Growth rate = G | 4.80% | |
a | P/E = Dividend Payout Ratio / R – G | |
Expected rate = R = Dividend payout/(P/E Ratio) + G | 6.8455% | |
b | Expected Market return | 8% |
Growth rate required | 0.059545455 | |
P/E Ratio | 22 | |
Dividend payout ratio | 45% |
Formulae
Suppose the Price/Earnings Ratio for the S&P 500 is 22 and the dividend payout ratio of...
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