Why should I choose AnalystNotes?

AnalystNotes specializes in helping candidates pass. Period.

Find out more

Basic Question 2 of 3

Given the following information:

  • Dividend payout ratio: 60%.
  • Dividend growth rate: 8%.
  • Cost of equity: 15%.

The leading P/E multiple is ______.
Check Answer Previous Q Next Q Print

User Contributed Comments 4

User Comment
danlan2 Trailing P/E=0.6*1.08/(0.15-0.08)=9.26
aravinda I think i got to know why...

fOR Trailing P/E... P0/E0 = D1/(r-g)
Where D1 = next period dividend = Current div * growth rate in div

==> D1 = D0(1+g)

This is the reason why we multiply growth rate to the div payout ratio.

And the assumption is that the dividend payout ratio will not change from period to period.
birdperson nice aravinda, good logic
olympria Current P = D next period / r-g
P/E = D next period/Earnings / (r-g) = payout ratio / (r-g)
Trailing P/E uses past earnings
Forward P/E uses next period earnings
But "P" (the numerator) always uses next period Dividend (GGM model)
Therefore, Trailing P/E will use next period Dividend (as required by P) and past earnings (as required by E in trailing). Therefore numerator alone needs multiplication by (1+g)
And, Forward P/E will use both next period values. Therefore it will not need multiplication 1+g (since it will cancel out being in numerator and denominator)
You need to log in first to add your comment.
I used your notes and passed ... highly recommended!
Lauren

Lauren

Learning Outcome Statements

calculate and interpret alternative price multiples and dividend yield;

calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;

explain and justify the use of earnings yield (E/P);

describe fundamental factors that influence alternative price multiples and dividend yield;

calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;

calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;

evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;

calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;

calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;

explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;

calculate and interpret EV multiples and evaluate the use of EV/EBITDA;

CFA® 2025 Level II Curriculum, Volume 4, Module 23.