CFA Practice Question

There are 201 practice questions for this study session.

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.

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.
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