Question #16
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 6
Status: Correct
Correct Answer: A
Question
The Farmer Co. has a payout ratio of 70% and a return on equity (ROE) of 14%. What will be the appropriate price-to-book value (PBV) based on fundamentals if the expected growth rate in dividends is 4.2% and the required rate of return is 11%?
Answer Choices:
A. 0.64
B. 1.44
C. 1.50
Explanation
Based on fundamentals:
P/BV = (0.14 − 0.042) / (0.11 − 0.042) = 1.44.