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.
A) What is the expected sustainable growth rate?
B) What is your expectation of the market P/E ratio?
C) To what price will the market rise if the earnings expectation is $1.5?
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