Question #42
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 0.55, a beta of 0.92, and an expected earnings growth rate of 0.07. 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. 11.43
B. 7.65
C. 10.14
Explanation
Predicted P/E = 7.65 + (3.75 × 0.55) + (15.35 × 0.07) − (0.70 × 0.92) = 10.14