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Expected sustainable growth rate, market P/E, price increase

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Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent.

1. What is the expected sustainable growth rate?

2. What is your expectation of the market P/E ratio?

3. To what price will the market rise if the earnings expectation is $1.5?

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The solution explains the calculation of expected sustainable growth rate, market P/E and price increase

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1. What is the expected sustainable growth rate?

Sustainable Growth Rate = Return On Equity X (1-dividend payout ...

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