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**CFA Practice Question**

A stock market series has aggregate sales of $356,000. Its net income margin is 5.5% of sales with a total asset turnover of 1.75 and debt as a fraction of total capital equaling 40%. The payout ratio is 45% and the risk-free rate is 5.5%. The market risk premium is 6%. What is the implicit P/E ratio for the stock series?

A. 10.51

B. 16.67

C. 20.37

**Explanation:**Since Debt/Total capital is 40%, Equity/Total capital = 60%. Total capital equals total assets on the balance sheet. Thus, from the DuPont equation:

ROE = 0.055 x 1.75 x (1/0.60) = 0.1604, g = (1 - Payout ratio) x ROE = (1 - 0.45) x 0.1604 = 0.088, k

_{S}= 5.50 + 6.00 = 11.50%, P-E Ratio = Payout ratio / (Discount rate - g) = 0.45 / (0.115 - 0.088) = 16.67

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**User Contributed Comments**
15

User |
Comment |
---|---|

jayjunk |
11.5% is the rate of return of the market. How did it become the discount rate for the series? |

mirco |
How much is beta? |

andy4cfa |
Stock market series means the Beta=1 |

nsmwaura |
Wao thats quite a question |

dealsoutlook |
hard question.. |

surob |
Time pressure is killing me |

sagania |
I think this exam is more a time challenge than breaking down calculation, be prepared to guess and guess, by excluding two of the options given,,, |

jpducros |
Tough question but I've seen it asked several times accross Mock exams....so be prepared. |

gazman1984 |
Given that we no the growth. Why done we used D1 when using the dividend discount model to value the Price? |

moneyguy |
Getting tired of guessing because I don't have these equations memorized. Does everyone else really have no problem with the 2,475 equations we have to know. No way I'll pass the exam. Not a chance! |

animals198 |
Calm your tits bro just stay calm and focus |

bidisha |
Stay calm and focus Stay calm and focussss |

mbuenafe |
Hard question. 3 way Dupont is NP margin x Asset TO x Financial Leverage ratio. How is Financial Leverage ratio = 1/0.60??? |

mbuenafe |
Is it because A = L + E; 1 = 0.40 + 0.60? Therefore Total Assets/ Total Equity = 1 / 0.60 = Financial Leverage Ratio...? |

chesschh |
que pasados... |