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**Basic Question 1 of 7**

Justin is trying to estimate the leading P/E multiple of IBM. The current stock price is $86.2. Justin gathers the following data from the company's financial statements:

IBM's current fiscal year ends in December 2002. The expected EPS for the 4th quarter of 2002 and the next fiscal year are $0.48 and $3.66, respectively. The leading P/E of IBM is ______.

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**User Contributed Comments**
11

User |
Comment |
---|---|

prabhur08 |
If we assume that today is December 31, 2002 then the answer is correct i.e. leading PE is Current Price / Fiscal 2003 earnings. However the question says that the expected EPS for Q4 2002 is $0.48 So the leading P/E should include Q4 2002 earnings + 3 Quarters of Earnings for 2003 (if today is September 30, 2002) So there is insufficient information to answer the question. |

tim2 |
When you see forward PEs quoted they are usually just the price divided by the estimate for the next year. There's not that much point trying to break it down by quarters as the figures are all just rough estimates that are going to be wrong anyway |

tarun2106 |
thats not really true. If you are in the begining of say Q2, then you would probabily see the next 4 Quarters earnings rather than next Fiscal. |

Nando1 |
I agree with prabhur. One can use either the forecasted earnings for the next 12 months OR the next full-year fiscal period. Therefore, the answer could be 26.73 or 23.55 depending on the method used. |

michlam14 |
i dont even understand what that table is meant for, and for what period it is meant to represent |

johntan1979 |
Table is not needed to calculate leading P/E. All you need is current price of the share and expected EPS for next fiscal year. |

gill15 |
It explicitly says in the notes you can use the NEXT four quarters OR the NEXT fiscal year. We dont have the next four quarters of information directly so choose other. |

HolzGe1 |
good point gill! |

CJPerugini |
Because Q-Q EPS is so volatile, shouldn't we break down EPS growth on a year over year quarterly basis? From that we can forecast 2003Q4 EPS, then determine YOY EPS by (2003 EPS - 2003Q4 EPS + 2002Q4 EPS). |

jrojasut09 |
@gill you hit the nail on the head |

walterli |
This table lmao |

I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.

#### Martin Rockenfeldt

**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.*