Question #93
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: 32
Status: Unattempted
Question
What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?
Answer Choices:
A. 4.00
B. 4.24.
C. 6.36.
Explanation
P0/E0 = (0.40 × 1.06) / (0.16 – 0.06) = 4.24