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**CFA Practice Question**

A firm has the following ROE for the years 20X0 to 20X4:

20X1 8%

20X2 6%

20X3 5%

20X4 9%

20X0 7%

20X1 8%

20X2 6%

20X3 5%

20X4 9%

An analyst wishes to determine the P/E ratio for year 20X5, but the firm appears to have unusually large earnings for 20X5. The analyst therefore decides to use the normalized earnings to be calculated from data from the years 20X0 to 20X4. The book value per share for year 20X5 is $5, and the price of the stock is $10. What is the P/E ratio for 20X5 based on the normalized earnings?

A. 28.57

B. 25.00

C. 33.33

**Explanation:**To calculate normalized earnings first calculate normalized ROE as the average of the ROE for the years 20X0 to 20X4. Then calculate normalized EPS = normalized ROE * book value per share, and finally normalized P/E = Price / normalized EPS

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**User Contributed Comments**
3

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

safash |
7+8+6+5+9/5=7 .07*5=.35 =10/.035 =28.57 |

moneyguy |
nice, safash |

cfastudypl |
it is 10/.35= 28.57 but thanks safash. |