Question

You are trying to estimate the implied equity risk premium to use for an emerging

market and have been provided with the following information:

• The equity index for the market is currently trading at 10,500.

• Based upon earnings in the just completed financial year, the market trades at

a price/earnings ratio of 10.

• Earnings are expected to grow 5% a year in perpetuity and firms are expected

to pay out 60% of their earnings as dividends in perpetuity.

• The risk-free rate for the market is 5.2%.

Estimate the implied equity risk premium for the emerging market, using the information supplied in

the problem.

Answer 1