Question
Asked Oct 13, 2019

 

Price/Earnings Ratio for the S&P 500 is 15 and the dividend payout ratio of the S&P 500 is 28%. The future growth rate of dividends is expected to be 3.35%. What is the expected return of the market?

 

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Expert Answer

Step 1

Expected return can be described as the amount which an investor can either gain or loss on investing in a project.

It is given that,

Dividend payout ratio is 28%.

Future growth rate of dividend is 3.35%.

Step 2

The formula to calculate growth rate is helpful to estimate expected return of the market.

Return on equity x (1- Dividend payout ratio)
Growth rate
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Return on equity x (1- Dividend payout ratio) Growth rate

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Step 3

Substitute 3.35% for growth rate and 28% for div...

0.0335 Return on equity x (1-0.28)
0.0335
= Return on equity
0.72
0.04652 or 4.652% = Return on equity
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0.0335 Return on equity x (1-0.28) 0.0335 = Return on equity 0.72 0.04652 or 4.652% = Return on equity

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