Given the three EPS estimates in Problem 6, you are also given the following estimates related to the market earnings multiple:
PESSIMISTIC CONSENSUS OPTIMISTIC
D/E 0.65 0.55 0.45
Nominal RFR 0.10 0.09 0.08
Risk Premium 0.05 0.04 0.03
ROE 0.11 0.13 0.015
- Based on the threeEPS and P/E estimates, compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013.
- Assuming that the S&P Industrials Index at the beginning of the year was priced at 2,050, compute your estimated rate of return under the three scenarios from Part a. Assuming your required rate of return is equal to the consensus, how would you weight the S&P Industrials Index in your global portfolio?
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