- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to earnings: valuation based on forecasted fundamentals

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**CFA Practice Question**

An analyst is employing a cross-sectional regression based on fundamentals to predict the justified value of the P/E multiple of a company. She obtained the regression coefficients by running tests with other large-cap stocks in the same industry. The resulting regression equation looks like this:

P/E = 16.5 - 2.7 Beta + 5.4 Dividend Payout Rate + 18.0 Long-term growth

She then looked up the latest consensus estimates of the fundamentals for the company:

- Beta = 1.1
- Dividend Payout Rate = 64%
- Long-Term Growth Rate = 4.5%

The predicted P/E from regression is ______.

A. 17.80

B. 15.20

C. 16.38

**Explanation:**By plugging the numbers into the regression equation, Barbara finds the predicted P/E:

P/E = 16.5 - 2.7 x 1.1 + 5.4 x 0.64 + 18.0 x 0.045 = 16.5 - 2.97 + 3.456 + 0.81 = 17.80.

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**User Contributed Comments**
2

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

volkovv |
We can only dream for questions like this on the real exam. Not going to happen. |

DariSH |
why not? I've seen questions exactly like this on the exam. |