CFA Practice Question

There are 201 practice questions for this study session.

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)
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