### CFA Practice Question

The current P-E ratio for an index, based on expected earnings is 15.5. The current EPS is 300.20, the projected EPS is 326.55, and the projected payout ratio is 55%. If the projected value of the index after one year is 5,190.30, what is the expected return on the index over the next year?
A. 15.40%
B. 6.09%
C. 14.70%
Explanation: The current index value = Current P-E ratio x Projected EPS = 15.5 x 326.55 = 5,061.53.
End of year dividend payment = 326.55 x 0.55 = 179.60
Expected return = [(5,190.30 + 179.60) / 5,061.53] - 1 = 0.0609, or 6.09%

User Comment
danlan Current value is based on projected EPS.
sharpos i missed the divdend part out

but shouldnt this be calculated against the current indew rate of 4653.10

as it asks for the return of the index over the next year.
schelsea Return on Index = Capital Gain + Dividends
Current index rate uses Current PE and Projected EPS, not Current EPS.
seeksan I doubt..when it clearly mentions it as currentP/E.We should current EPS.if it had said forward P/E then only is the case of projected eps.
NIKKIZ Doesn't EPS include dividends?
andrewmorgan if this was a price index the return would not include dividends
harrybay Seeksan is right on. If anyone in the the financial world refers to the current P/E, they are talking about Current price/Current EPS.