On a certain day in February 2008, Amazon.com's forward P/E was reported to be 32.31 and its beta was 3.04. The relevant risk-free rate at the time was 3%. Assume that 5% is a reasonable
Equity premium to use. What does this data suggest Amazon's expected eternal earnings
Growth rate was?

Question

Quizplus · Accepted Answer

The expected return using the CAPM model is calculated as: Risk-free rate + Beta * Equity premium = 3% + 3.04 * 5% = 18.2%. The expected earnings growth rate can be estimated using the formula: Expected return = Dividend yield + Growth rate. Assuming no dividends, the growth rate is approximately the expected return minus the inverse of the P/E ratio: 18.2% - (1/32.31) ≈ 15.2%.

On a Certain Day in February 2008, Amazon