(Adapted from 2001 CFA Level I1 exam) Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathers the information given in Exhibit 20-1 to help in his analysis.
| EXHIBIT 20-1 Fundamental industry and Market Data Don't use plagiarized sources. Get Your Custom Essay on determine whether each of the fundamental factors in exhibit 20 2 would cause pies t 543650 For $10/Page 0nly | |
| Forecasted industry earnings retention rate | 40% |
| Forecasted industry return on equity | 25% |
| Industry beta | 1.2 |
| Government bond yield | 6% |
| Equity risk premium | 5% |
A. Compute the price to earnings (Po/EI) ratio for the industry based on the fundamental data in Exhibit 20-1. Show your work. Jones wants to analyze how fundamental PIES might differ among countries. He gathers the data given in Exhibit 20-2:
| EXHIBIT 20-2 Economic and Market Data | ||
| Fundamental Factors | Country A | Country B |
| Forecasted growth in real gross domestic product | 5% | 2% |
| Government bond yield | 10% | 6% |
| Equity risk premium | 5% | 4% |
B. Determine whether each of the fundamental factors in Exhibit 20-2 would cause PIES to be generally higher for Country A or higher for Country B. Justify each of your conclusions with one reason. Note: Consider each fundamental factor in isolation, with all else remaining equal.
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