Question #128
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: 46
Status: Unattempted
Question
What is the appropriate leading price-to-earnings (P/E) multiple of a stock that has a projected payout ratio of 40% if shareholders require a return of 15% on their investment and the expected growth rate in dividends is 5%?
Answer Choices:
A. 6.30
B. 13.20
C. 4.00
Explanation
Justified leading P/E = P0/E1 = (1– b) / (r– g) = 0.40 / (0.15 – 0.05) = 4.00
Note that the leading P/E omits (1 + g) in the numerator, which is present in the formula
for the trailing P/E.