Tang estimates the expected inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang believes that the markets are currently overvalued by 3%. The yield on the market index is 1.7%, and the expected risk-free rate of return is 2.7%.

I understood every part of the solution the problem provided. However, why did they do the below for the P/E ratio? I actually did 1+0.03 to calculate the expected growth in the P/E

PEg = relative value changed due to changes in P/E ratio = −0.03

ERP= (1.026) × (1.030) × (0.97) − 1 + 0.017 − 0.027 = 0.015 = 1.50%