Chart1

Figure 20.7: Dividend Yields on S& P 500 - 1960 to 1994

6.00%

5.00%

3.00%
Dividend Yield

2.00%

1.00%

Year

Page 1

93
19

90
19

87
19

84
19

81
19

78
19

75
19

72
19

69
19

66
19

63
19

60

0.00%
19

Dividend Yield

4.00%

Chart2

Figure 20.1: Aggregate Earnings and Dividends: S & P 500 - 1960-1994

35.00

30.00

25.00

20.00
$

Earnings
Dividends

15.00

10.00

5.00

Year

Page 2

93
19

90
19

87
19

84
19

81
19

78
19

75
19

72
19

69
19

66
19

63
19

19

60

0.00

Chart3

Implied Risk Premium: U.S. Equities

7.00%

6.00%

4.00%

3.00%

2.00%

1.00%

Year

Page 3

96
19

93
19

90
19

87
19

84
19

81
19

78
19

75
19

72
19

69
19

66
19

63
19

60

0.00%
19

Implied Premium (%)

5.00%

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.70381468
R Square
0.4953551
Adjusted R Square
0.46567011
Standard Error 0.00767584
Observations
37
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1
X Variable 2

SS
MS
F
Significance F
2 0.00196635 0.00098318 16.6870543 8.9281E-006
34 0.00200323 5.8919E-005
36 0.00396959

Coefficients Standard Error

t Stat
P-value
Lower 95% Upper 95%
0.02043957 0.00410783 4.97575511 1.8466E-005 0.01209146 0.02878769
0.28552576 0.05093033 5.60620237 2.7989E-006 0.18202293 0.38902858
-0.20878349 0.11638756 -1.79386431 0.08173279 -0.44531131 0.02774433

Lower 95.0%
0.01209146
0.18202293
-0.44531131

Upper 95.0%
0.02878769
0.38902858
0.02774433

4.00%

3.00%
Implied Premium

Figure 9: Implied Premium for US Equity Market

7.00%

6.00%

5.00%

2.00%

1.00%

0.00%

2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
Year

Figure 11: Implied ERP and Risk free Rates

25.00%
Expected Return on Stocks = T.Bond Rate + Equity Risk
Premium
20.00%

At the end of 2008, the ERP

was almost three times the
riskfree rate. The highest ratio
ever prior to this was in 1960,
when the ERP was 1.2 times
the riskfree rate.

15.00%

10.00%

5.00%

T. Bond Rate

1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

0.00%

Implied Premium (FCFE)

T.Bond Rate

Sheet1

Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Earnings Yield
5.34%
4.71%
5.81%
5.51%
5.62%
5.73%
6.74%
5.66%
5.51%
6.63%
5.98%
5.46%
5.23%
8.16%
13.64%
8.55%
9.07%
11.43%
12.11%
13.48%
11.04%
12.39%
9.83%
8.06%
10.07%
7.42%
5.96%
6.49%
8.20%
6.80%
6.58%
4.58%
4.16%
4.25%
5.89%
5.74%
4.83%
4.08%
3.11%
3.07%
3.94%
3.85%
5.23%
4.87%
5.58%
5.47%
6.18%
5.62%
7.24%

Dividend Yield
3.41%
2.85%
3.40%
3.13%
3.05%
3.06%
3.59%
3.09%
2.93%
3.52%
3.46%
3.10%
2.70%
3.70%
5.43%
4.14%
3.93%
5.11%
5.39%
5.53%
4.74%
5.57%
4.93%
4.32%
4.68%
3.88%
3.38%
3.71%
3.68%
3.32%
3.74%
3.11%
2.90%
2.72%
2.91%
2.30%
2.01%
1.60%
1.32%
1.14%
1.23%
1.37%
1.83%
1.61%
1.60%
1.79%
1.77%
1.89%
3.11%

S&P 500
58.11
71.55
63.1
75.02
84.75
92.43
80.33
96.47
103.86
92.06
92.15
102.09
118.05
97.55
68.56
90.19
107.46
95.1
96.11
107.94
135.76
122.55
140.64
164.93
167.24
211.28
242.17
247.08
277.72
353.4
330.22
417.09
435.71
466.45
459.27
615.93
740.74
970.43
1229.23
1469.25
1320.28
1148.09
879.82
1111.91
1211.92
1248.29
1418.3
1468.36
903.25

Earnings
3.10
3.37
3.67
4.13
4.76
5.30
5.41
5.46
5.72
6.10
5.51
5.57
6.17
7.96
9.35
7.71
9.75
10.87
11.64
14.55
14.99
15.18
13.82
13.29
16.84
15.68
14.43
16.04
24.12
24.32
22.65
19.30
20.87
26.90
31.75
37.70
40.63
44.09
44.27
51.68
56.13
38.85
46.04
54.69
67.68
76.45
87.72
82.54
65.39

Dividends
1.98
2.04
2.15
2.35
2.58
2.83
2.88
2.98
3.04
3.24
3.19
3.16
3.19
3.61
3.72
3.73
4.22
4.86
5.18
5.97
6.44
6.83
6.93
7.12
7.83
8.20
8.19
9.17
10.22
11.73
12.35
12.97
12.64
12.69
13.36
14.17
14.89
15.52
16.20
16.71
16.27
15.74
16.08
17.88
19.407
22.38
25.05
27.73
28.05

Change in Earnings

Change in Dividends

8.60%
8.79%
12.75%
15.23%
11.20%
2.23%
0.85%
4.81%
6.66%
-9.72%
1.15%
10.76%
28.93%
17.48%
-17.54%
26.39%
11.53%
7.07%
25.01%
3.01%
1.31%
-8.95%
-3.84%
26.69%
-6.91%
-7.93%
11.10%
50.42%
0.83%
-6.87%
-14.79%
8.13%
28.89%
18.03%
18.74%
7.77%
8.52%
0.41%
16.74%
8.61%
-30.79%
18.51%
18.79%
23.75%
12.96%
14.74%
-5.91%
-20.78%

2.91%
5.21%
9.45%
10.08%
9.42%
1.96%
3.37%
2.09%
6.49%
-1.61%
-0.74%
0.71%
13.24%
3.14%
0.30%
13.10%
15.07%
6.60%
15.23%
7.81%
6.08%
1.58%
2.76%
9.85%
4.74%
-0.15%
11.99%
11.49%
14.80%
5.26%
5.03%
-2.59%
0.41%
5.34%
6.00%
5.10%
4.25%
4.37%
3.16%
-2.65%
-3.24%
2.15%
11.19%
8.54%
15.32%
11.93%
10.70%
1.15%

Page 8

T.Bill Rate
0.0266
2.13%
2.73%
3.12%
3.54%
3.93%
4.76%
4.21%
5.21%
6.58%
6.53%
4.39%
3.84%
6.93%
8.00%
5.80%
5.08%
5.12%
7.18%
10.38%
11.24%
14.71%
10.54%
8.80%
9.85%
7.72%
6.16%
5.47%
6.35%
8.37%
7.81%
7.00%
5.30%
3.50%
5.00%
3.50%
5.00%
5.35%
4.33%
5.37%
5.73%
1.80%
1.20%
1.00%
2.18%
4.31%
4.88%
3.31%
1.59%

T.Bond Rate
2.76%
2.35%
3.85%
4.14%
4.21%
4.65%
4.64%
5.70%
6.16%
7.88%
6.50%
5.89%
6.41%
6.90%
7.40%
7.76%
6.81%
7.78%
9.15%
10.33%
12.43%
13.98%
10.47%
11.80%
11.51%
8.99%
7.22%
8.86%
9.14%
7.93%
8.07%
6.70%
6.68%
5.79%
7.82%
5.57%
6.41%
5.74%
4.65%
6.44%
5.11%
5.05%
3.81%
4.25%
4.22%
4.39%
4.70%
4.02%
2.21%

Bond-Bill
0.10%
0.22%
1.12%
1.02%
0.67%
0.72%
-0.12%
1.49%
0.95%
1.30%
-0.03%
1.50%
2.57%
-0.03%
-0.60%
1.96%
1.73%
2.66%
1.97%
-0.05%
1.19%
-0.73%
-0.07%
3.00%
1.66%
1.27%
1.06%
3.39%
2.79%
-0.44%
0.26%
-0.30%
1.38%
2.29%
2.82%
2.07%
1.41%
0.39%
0.32%
1.07%
-0.62%
3.25%
2.61%
3.25%
2.04%
0.08%
-0.18%
0.71%
0.62%

Smoothed Growth
2.45%
2.41%
4.05%
4.96%
5.13%
5.46%
4.19%
5.25%
5.32%
7.55%
4.78%
4.57%
5.21%
8.30%
6.42%
5.99%
8.19%
9.52%
8.48%
11.70%
11.01%
11.42%
7.96%
9.09%
11.02%
7.89%
5.54%
9.66%
9.76%
9.58%
7.39%
6.34%
4.67%
4.73%
7.23%
5.65%
6.13%
5.45%
4.60%
5.75%
3.71%
3.56%
3.57%
5.35%
4.90%
6.16%
5.93%
5.03%
2.11%

Sheet1

2009
2010
2011
2012

5.35%
6.65%
7.72%
7.18%

2.00%
1.84%
2.07%
2.13%

1115.10
1257.64
1257.60
1426.19

59.65
83.66
97.05
102.47

22.31
23.12
26.02
30.44

-8.78%
40.25%
16.01%
5.58%

Page 9

-20.46%
3.63%
12.54%
16.99%

0.14%
0.13%
0.03%
0.05%

3.84%
3.29%
1.88%
1.76%

3.70%
3.16%
1.85%
1.71%

0.28%
3.33%
2.75%
2.93%

Sheet1

Implied Premium (DDM)

2.92%
3.56%
3.38%
3.31%
3.32%
3.68%
3.20%
3.00%
3.74%
3.41%
3.09%
2.72%
4.30%
5.59%
4.13%
4.55%
5.92%
5.72%
6.45%
5.03%
5.73%
4.90%
4.31%
5.11%
4.03%
3.36%
4.18%
4.12%
3.85%
3.92%
3.27%
2.83%
2.74%
3.06%
2.44%
2.11%
1.67%
1.38%
1.20%
1.65%
1.73%
2.29%
2.12%
2.02%
2.20%
1.97%
2.06%
4.05%

Analyst Growth Estimate

Implied Premium (FCFE)

6.75%
6.96%
8.58%
7.67%
7.46%
7.19%
7.81%
9.83%
8.00%
7.17%
6.50%
7.92%
8.00%
7.20%
12.50%
12.00%
10.30%
8.00%
11.00%
8.50%
8.00%
12.50%
5.00%
4.00%

2.92%
3.56%
3.38%
3.31%
3.32%
3.68%
3.20%
3.00%
3.74%
3.41%
3.09%
2.72%
4.30%
5.59%
4.13%
4.55%
5.92%
5.72%
6.45%
5.03%
5.73%
4.90%
4.31%
5.11%
3.84%
3.58%
3.99%
3.77%
3.51%
3.89%
3.48%
3.55%
3.17%
3.55%
3.29%
3.20%
2.73%
2.26%
2.05%
2.87%
3.62%
4.10%
3.69%
3.65%
4.08%
4.16%
4.37%
6.43%

ERP/Riskfree Rate
1.24
0.92
0.82
0.79
0.71
0.79
0.56
0.49
0.47
0.52
0.52
0.42
0.62
0.76
0.53
0.67
0.76
0.63
0.62
0.40
0.41
0.47
0.37
0.44
0.43
0.50
0.45
0.41
0.44
0.48
0.52
0.53
0.55
0.45
0.59
0.50
0.48
0.49
0.32
0.56
0.72
1.08
0.87
0.86
0.93
0.89
1.09
2.91

Page 10

Sheet1

2.60%
2.24%
2.71%
2.47%

7.20%
6.95%
7.18%
5.27%

4.36%
5.20%
6.04%
5.78%

1.14
1.58
3.21
3.28

Page 11