Question #44
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: 16
Status: Correct
Correct Answer: A
Question
What is the justified leading price-to-earnings (P/E) multiple of a stock that has a retention ratio of 60% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?
Answer Choices:
A. 4.24
B. 6.36
C. 4.00
Explanation
Justified Leading P/E = P0/E1 = 1 − b / r − g = Payout ratio / r − g = 0.40 / (0.16 − 0.06) = 4.00