14. 29 anies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for

Question

14. 29 anies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for U.S. firms. Assume an average dividend payout rate of 100% for both U.S: andJ sed on the dividend growth model, in order for Japanese and U.S. companies to have the same average cost of eqt how much higher would the Japanese annual earnings growth rate have to be? a) 7.24% b) 6.31% c) 5.83% d) 8.39% 100% Dividend payout ratio means iiolend Eornins for Janto 38 In orden to howe sovne overage cost Ans: d Section: The cost of equity capital the ostot eauit uS)ost of eqi Level: Difficult

Explanation / Answer

P/E = 38

P/D = 38

P=38D

38D = D/(e-gJ)

e-gJ = D/38D

e= 1/38 + gJ

P/E = 16

P/D = 16

P=16D

16D = D/(e-gU)

e-gU = D/16D

e= 1/16 + gU

1/38 + gJ = 1/16 + gU

gJ-gU = 1/16 -1/38 = 0.0625 - 0.0263 = 0.0362 = 3.62% (options seem incorrect)

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