Question #30
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: 10
Status: Correct
Correct Answer: A
Question
What is the appropriate justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if shareholders require a return of 15% on their investment and the expected growth rate in dividends is 5%?
Answer Choices:
A. 6.30
B. 4.20
C. 3.80
Explanation
P0/E0 = (0.40 × 1.05) / (0.15 – 0.05) = 4.20