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Basic Question 1 of 2
ABC shares are currently trading at $17.50 per share. The company is widely expected to retain 72% of their next year's earnings, resulting in a dividend payment of $1.25. Further research reveals that ABC has a beta of 1.3, at a time when the market risk premium is 5.2% above the risk-free rate of 3.2%. What should be leading P/E ratio for ABC if its earnings are expected to grow at 6% indefinitely?
B. 7.07.
C. 12.84.
A. 3.92.
B. 7.07.
C. 12.84.
User Contributed Comments 3
| User | Comment |
|---|---|
| Nightsurfer | Why can't you figure out expected earnings from the expected dividend payment of $1.25 and divide it into the current stock price? E1 = 1.25 / (1 - 0.72) = $4.4643 P0/E1 = $17.50 / $4.4643 = 3.95 |
| noonah | Nightsurfer, you have calculated the actual leading P/E, not the one as per GGM, as the question indicates by "what should be the leading P/E". Fundamental to GGM is the discounting by the factor (r-g). |
| davidt876 | nice noonah. and because the actual P/E is lower than the estimated P/E with GGM, we can assume that the stock price has room to grow |
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Learning Outcome Statements
calculate and interpret the justified leading and trailing P/Es using the Gordon growth model;
CFA® 2025 Level II Curriculum, Volume 3, Module 21.