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Question
Assume that the dividend payout ratio on the S&P 500 will be 40 percent when the rate on long-term government bonds falls to 9 percent. Investors being risk averse demand an equity risk premium of 8 percent. If the growth rate of dividends is expected to be 10 percent, what will be the price of the market index if the earnings expectation is $30?a. $384.00
b. $213.44
c. $266.56
d. $171.43
Answer
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