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%
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 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. |