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Basic Question 2 of 3
Given the following information:
- Dividend payout ratio: 60%.
- Dividend growth rate: 8%.
- Cost of equity: 15%.
The leading P/E multiple is ______.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | Trailing P/E=0.6*1.08/(0.15-0.08)=9.26 |
| aravinda | I think i got to know why... fOR Trailing P/E... P0/E0 = D1/(r-g) Where D1 = next period dividend = Current div * growth rate in div ==> D1 = D0(1+g) This is the reason why we multiply growth rate to the div payout ratio. And the assumption is that the dividend payout ratio will not change from period to period. |
| birdperson | nice aravinda, good logic |
| olympria | Current P = D next period / r-g P/E = D next period/Earnings / (r-g) = payout ratio / (r-g) Trailing P/E uses past earnings Forward P/E uses next period earnings But "P" (the numerator) always uses next period Dividend (GGM model) Therefore, Trailing P/E will use next period Dividend (as required by P) and past earnings (as required by E in trailing). Therefore numerator alone needs multiplication by (1+g) And, Forward P/E will use both next period values. Therefore it will not need multiplication 1+g (since it will cancel out being in numerator and denominator) |
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Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.