Calculate the residual earnings growth rate

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Question: Reverse Engineering Growth Forecasts for the S&P 500 Index (Medium) With the S&P price index at 1270 in early 2006, the S&P 500 stocks traded at 2.5 times book value. On most recent (2005) annual earnings, the stocks in the index earned a weighted average return on their common equity of 18 percent. Use a required equity return of 10 percent for this "market portfolio."

a. Calculate the residual earnings growth rate that the market is forecasting for these stocks.

b. Suppose you forecast that a return on common equity of 18 percent will be sustained in the future. What is the growth in the net assets that you would then forecast at the current level of the index?

Reference no: EM131490695

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