1 Which formula below best expresses the real interest rate, (r)? A

Finance Aug 21, 2020

1 Which formula below best expresses the real interest rate, (r)? A. i=r-te B. r= i + the C. r=i - The D. Te =i+r

2.A company’s expected earnings per share and dividend per share are $1.40 and $0.84 respectively. What is the company's theoretical P/E ratio (to one decimal place) if the cost of equity is 9.1% and the long-run growth rate in sales and earnings is 3.2%

Expert Solution

ans1.

Solution

r = i - π^e (OPTION C)

According to the Fisher formula,

(1 + nominal interest rate) = (1 + real rate of interest) * (1 + inflation),

Real interest rate is rate of interest adjusted for inflation.

Formula÷ r= i - $\prod$ e

EPS = $1.40

Div = $0.84

re = 9.1%

g = 3.2%

Price = Div/(r - g)

Price = 0.84/(0.091 - 0.032)

Price = $14.2372881356

P/E ratio = Price/EPS

P/E ratio = 14.2372881356/1.40

P/E ratio = 10.1694915254

P/E ratio = 10.2

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