- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 4. Multiplier Models

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**CFA Practice Question**

An analyst gathers the following data about a company in order to estimate its price-earnings (P/E) ratio.

Return on equity: 15%

Required rate of return: 12%

Stock's current market price: $75

Expected dividend payout ratio: 40%

Return on equity: 15%

Required rate of return: 12%

Stock's current market price: $75

The P/E ratio is closest to ______.

A. 8.7 x

B. 13.3 x

C. 15.8 x

**Explanation:**Growth rate = g = RR x ROE = (1 - 0.40) x 15 = 9%

P/E1 = (D1/E1) / (k - g) = 0.40 / (0.12 - 0.09) = 13.33

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