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**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%

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**User Contributed Comments**
7

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. |