Assume that the stock market index is trading at a level of 4,500. You can interpret this index level as a scaled price that was set at some point to 100 and appreciates as the stocks included in the index appreciate. The long- term risk-free rate is 1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in the stock market index are expected to be 132 next year and the payout ratio (dividends as a percentage of earnings) has been 45% and is expected to remain 45%. What additional assumptions can justify the stock market index level of 4,500? Show your calculations and explain your reasoning carefully
Assume that the stock market index is trading at a level of 4,500. You can interpret this index level as a scaled price that was set at some point to 100 and appreciates as the stocks included in the index appreciate. The long- term risk-free rate is 1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in the stock market index are expected to be 132 next year and the payout ratio (dividends as a percentage of earnings) has been 45% and is expected to remain 45%. What additional assumptions can justify the stock market index level of 4,500? Show your calculations and explain your reasoning carefully
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter8: Basic Stock Valuation
Section: Chapter Questions
Problem 3P
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Transcribed Image Text:Assume that the stock market index is trading
at a level of 4,500. You can interpret this index
level as a scaled price that was set at some
point to 100 and appreciates as the stocks
included in the index appreciate. The long-
term risk-free rate is 1.3%. The aggregate
earnings (scaled in the same way as the index
level) of the firms in the stock market index
are expected to be 132 next year and the
payout ratio (dividends as a percentage of
earnings) has been 45% and is expected to
remain 45%. What additional assumptions can
justify the stock market index level of 4,500?
Show your calculations and explain your
reasoning carefully
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