Ibbotson Chen Earnings Model Solution

STEP 0: Pre-Calculation Summary
Formula Used
Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100
ERP = ((1+(I*0.01))*(1+(rEg*0.01))*(1+(Peg*0.01))-1+(Y*0.01)-(RF*0.01))*100
This formula uses 6 Variables
Variables Used
Equity Risk Premium - Equity Risk Premium refers to an excess return that investing in the stock market provides over a risk-free rate.
Expected Inflation - Expected Inflation refers to the anticipated increase in the general price level of goods and services over a specific period, influencing economic decisions and monetary policy.
Expected Real Growth in EPS - Expected Real Growth in EPS is the rate at which a company's earnings per share (EPS) is increasing or decreasing, expressed as a percentage.
Expected Changes in PE Ratio - Expected Changes in PE Ratio include incorporating adjusted earnings or accounting for non-recurring items to provide a more accurate reflection of a company's valuation relative to its earnings.
Expected Yield on Index - Expected Yield on Index is the projected annual return, from the collective performance of its constituent assets, including dividends, interest, or other distributions, over a given period.
Expected Risk Free Rate - Expected Risk Free Rate is the anticipated return on an investment with no risk of financial loss, often approximated by yields on government bonds or similar securities over a specific time frame.
STEP 1: Convert Input(s) to Base Unit
Expected Inflation: 2 --> No Conversion Required
Expected Real Growth in EPS: 8 --> No Conversion Required
Expected Changes in PE Ratio: 1.5 --> No Conversion Required
Expected Yield on Index: 6 --> No Conversion Required
Expected Risk Free Rate: 7 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
ERP = ((1+(I*0.01))*(1+(rEg*0.01))*(1+(Peg*0.01))-1+(Y*0.01)-(RF*0.01))*100 --> ((1+(2*0.01))*(1+(8*0.01))*(1+(1.5*0.01))-1+(6*0.01)-(7*0.01))*100
Evaluating ... ...
ERP = 10.8124
STEP 3: Convert Result to Output's Unit
10.8124 --> No Conversion Required
FINAL ANSWER
10.8124 <-- Equity Risk Premium
(Calculation completed in 00.004 seconds)

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Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad
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Quantitative Finance Calculators

Ibbotson Chen Earnings Model
​ LaTeX ​ Go Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100
Capital Market Line
​ LaTeX ​ Go Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk
Risk Neutral Probability
​ LaTeX ​ Go Risk Neutral Probability = (((1+(Risk Free Rate/100))*Initial Stock Price)-Stock Down Price)/(Stock Price Up-Stock Down Price)

Ibbotson Chen Earnings Model Formula

​LaTeX ​Go
Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100
ERP = ((1+(I*0.01))*(1+(rEg*0.01))*(1+(Peg*0.01))-1+(Y*0.01)-(RF*0.01))*100

What is Ibbotson Chen Earnings Model ?

The Ibbotson Chen Earnings Model incorporates the equity risk premium as a crucial component in determining the required rate of return for equity investments. The equity risk premium represents the additional return investors expect to receive for holding stocks rather than risk-free assets such as government bonds. In this model, the equity risk premium is factored into the discount rate used to calculate the present value of future earnings. By adjusting for the equity risk premium, the model accounts for the higher level of risk associated with investing in stocks relative to risk-free assets, thereby providing a more accurate assessment of a company's intrinsic value.



How to Calculate Ibbotson Chen Earnings Model?

Ibbotson Chen Earnings Model calculator uses Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100 to calculate the Equity Risk Premium, The Ibbotson Chen Earnings Model is a macroeconomic model for the Equity Risk Premium (ERP). Equity Risk Premium is denoted by ERP symbol.

How to calculate Ibbotson Chen Earnings Model using this online calculator? To use this online calculator for Ibbotson Chen Earnings Model, enter Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF) and hit the calculate button. Here is how the Ibbotson Chen Earnings Model calculation can be explained with given input values -> 10.8124 = ((1+(2*0.01))*(1+(8*0.01))*(1+(1.5*0.01))-1+(6*0.01)-(7*0.01))*100.

FAQ

What is Ibbotson Chen Earnings Model?
The Ibbotson Chen Earnings Model is a macroeconomic model for the Equity Risk Premium (ERP) and is represented as ERP = ((1+(I*0.01))*(1+(rEg*0.01))*(1+(Peg*0.01))-1+(Y*0.01)-(RF*0.01))*100 or Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100. Expected Inflation refers to the anticipated increase in the general price level of goods and services over a specific period, influencing economic decisions and monetary policy, Expected Real Growth in EPS is the rate at which a company's earnings per share (EPS) is increasing or decreasing, expressed as a percentage, Expected Changes in PE Ratio include incorporating adjusted earnings or accounting for non-recurring items to provide a more accurate reflection of a company's valuation relative to its earnings, Expected Yield on Index is the projected annual return, from the collective performance of its constituent assets, including dividends, interest, or other distributions, over a given period & Expected Risk Free Rate is the anticipated return on an investment with no risk of financial loss, often approximated by yields on government bonds or similar securities over a specific time frame.
How to calculate Ibbotson Chen Earnings Model?
The Ibbotson Chen Earnings Model is a macroeconomic model for the Equity Risk Premium (ERP) is calculated using Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100. To calculate Ibbotson Chen Earnings Model, you need Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF). With our tool, you need to enter the respective value for Expected Inflation, Expected Real Growth in EPS, Expected Changes in PE Ratio, Expected Yield on Index & Expected Risk Free Rate and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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