Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis:
|
Forecast industry earnings retention rate |
40% |
|
Forecast industry return on equity |
25% |
|
Industry beta |
1.2 |
|
Government bond yield |
6% |
|
Equity risk premium |
5% |
a. Compute the price to earnings (P0 /E1) ratio for the industry based on this fundamental data.
b. Jones wants to analyze how fundamental P/E ratios might differ among countries.
He gathered the following economic and market data:
|
Fundamental Factors |
Country A |
Country B |
|
Forecast growth in real GDP |
5% |
2% |
|
Government bond yield |
10% |
6% |
|
Equity risk premium |
5% |
4% |
Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for Country B.