Question #41
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: 15
Status: Correct
Correct Answer: A
Question
An analyst is valuing a company with a dividend payout ratio of 0.35, a beta of 1.45, and an expected earnings growth rate of 0.08. A regression on comparable companies produces the following equation: Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta) What is the predicted P/E using the above regression?
Answer Choices:
A. 11.21
B. 9.18
C. 7.65
Explanation
Predicted P/E = 7.65 + (3.75 × 0.35) + (15.35 × 0.08) − (0.70 × 1.45) = 9.1755