Question #136
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: 48
Status: Unattempted
Question
Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?
Answer Choices:
A. 6.00
B. 7.14
C. 9.00
Explanation
P5/E5 = (0.40 × 1.05) / (0.12 – 0.05) = 6.00