### 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, kS = 5.50 + 6.00 = 11.50%, P-E Ratio = Payout ratio / (Discount rate - g) = 0.45 / (0.115 - 0.088) = 16.67

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...?