Question: Challenging the Level of the S&P 500 Index with Analysts; Forecasts (Medium) The S&P 500 index stood at 1271 in early 2006. Based on analysts; consensus EPS forecasts for calendar year 2006, the forward PIE ratio for the index was 15.0 at the time. Those same analysts were giving the S&P 500 a PEG r a tio of 1.4 7, based on forecasts for 2007. The payout ratio for this portfolio of stocks was 2 7 percent at the time and investment banks typically published estimates of the equity risk premium of 5 percent over the current 10-year Treasury rate of 5 percent.

a. Calculate the abnormal earnings growth for 2007 (in dollars) that is implied by the forecasts.

b. What should be the level of the S&P 500 if (cum-dividend) earnings are forecasted to grow at 10 percent after the forward year? Why is the PIE based on analysts; forecasts different?

c. Setting the long-term abnormal earnings growth rate equal to 4 percent (the average growth rate for GDP), what do analysts; forecasts say about the level of the S&P 500 index?

d. What conclusions can your draw from this an alysis?