CAS Exam 7 Spring 2019, Question 17
Study guide: Exam 7
Given the following financial information for a property and casualty insurance company:
- Projected ROE = 9.0%.
- Projected dividend payout rate = 40.0%.
- Yield on long-term T-bonds = 4.7%.
- Term premium for long-term T-bonds = 1.3%.
- Expected equity risk premium = 7.0%.
- Insurer's equity beta = 0.8.
Part a (1 point)
Calculate the company's Price to Earnings (P-E) Ratio assuming projections continue in perpetuity.
Part b (0.5 points)
Explain the effect on the company's P-E ratio assuming the dividend payout rate changes to 60%.
Part c (0.5 points)
Explain the effect on the company's P-E ratio assuming the yield on long-term T-bonds is 4% and the equity risk premium is unchanged.
Part d (1 point)
Describe two alternative uses for the P-E ratio.
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