Question #57
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: 20
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Industrial Light had earnings per share (EPS) of $5.00 past year, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the trailing price-to-earnings (P/E) ratio?
Answer Choices:
A. 3.75
B. 7.50
C. 7.14
Explanation
1 − b = 1 − (2.50/5.00) = 0.50
P5 / E5 = (0.50 × 1.05) / (0.12 − 0.05) = 7.50