Given the following:
Labor input will grow 0.5%.
Labor productivity will grow 1.3%
Inflation will be 2.2%.
Dividend yield will be 2.8%.
Based on these forecasts, Cambo predicts a long-term 9.0% annual equity return
in the US market. Her forecast assumes no change in the share of prots in the
economy, and she expects some contribution to equity returns from a change in the
price-to-earnings ratio (P/E).
11 Calculate the implied contribution to Cambo’s US equity return forecast from
the expected change in the P/E.
Answer = 2.2% (I’m not quite sure how they get here)
I know that we
A. use the formula MVequity = GDP x Share Profits x PE
B. Convert to growth equity = sum of these parts
C. GDPnom = 0.5 + 1.3 + 2.2 = 4%
D. S = 0% (stated)
So I would have guessed 9% = 4% + PE change, thus PE = 5%. that’s wrong
Why do we deduct the dividend yield from this?. Is it simply that the P in PE gets adjusted down as dividends are paid out?