USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As an economist for a research firm, you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55 percent. Long-term government bond rates are at 6 percent, and the equity risk premium is estimated to be 3 percent. Return on equity (ROE) is estimated to be 11 percent.
-Refer to Exhibit 9.8. What is your expectation of the market P/E ratio?

A) 9.17
B) 11.11
C) 13.58
D) 18.33
E) 21.42