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Basic Question 3 of 11

A stock has a required return of 15%, a constant growth rate of 10%, and a dividend payout ratio of 45%. The stock's price-earnings ratio should be ______ times.

A. 3.0
B. 4.5
C. 9.0
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User Contributed Comments 3

User Comment
katybo P/E = payout/(r-g)
MasterD payout = (1 - b) where b is retension

P0 = E1 (1-b) / (r-g)

The price (P0) an equity purchaser should pay is proportional to earnings (E1) payed out (1-b) to the purchaser, discounted in perpetuity by the require rate (r) less expected growth rate of such earnings (g).
2014 dpr/r-g
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I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu

Edward Liu

Learning Outcome Statements

explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables

calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value

CFA® 2024 Level I Curriculum, Volume 3, Module 8.