- CFA Exams
- CFA Exam: Level II 2021
- Study Session 10. Equity Valuation (2)
- Reading 27. Discounted Dividend Valuation
- Subject 5. Gordon growth model and the P/E ratio

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**CFA Practice Question**

ABC Corp. has a retention ratio of 40% and a long term growth rate of 4.8%. If the required rate of return for this stock is 11.2%, what is the justified leading P/E ratio for ABC?

B. 5.63.

C. 9.38.

A. 5.36.

B. 5.63.

C. 9.38.

Correct Answer: C

Leading P/E = P

_{0}/E_{1}= (D_{1}/E_{1})/(r-g) = (1 - 0.4)/(0.112 - 0.048) = 9.38.###
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