- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 23. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to Earnings: Valuation Based on Forecasted Fundamentals
CFA Practice Question
Given the following information:
- Dividend payout ratio: 60%.
- Dividend growth rate: 8%.
- Cost of equity: 15%.
The leading P/E multiple is ______.
Correct Answer: 8.57
Leading P/E = (1 - b) / (r - g) = 0.6 / (0.15 - 0.08) = 8.57.
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) |