CFA Practice Question

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CFA Practice Question

A stock has a required return of 15%, a constant growth rate of 10%, and a dividend payout ratio of 45%. The stock's price-earnings ratio should be ______ times.

A. 3.0
B. 4.5
C. 9.0
Correct Answer: C

User Contributed Comments 3

User Comment
katybo P/E = payout/(r-g)
MasterD payout = (1 - b) where b is retension

P0 = E1 (1-b) / (r-g)

The price (P0) an equity purchaser should pay is proportional to earnings (E1) payed out (1-b) to the purchaser, discounted in perpetuity by the require rate (r) less expected growth rate of such earnings (g).
2014 dpr/r-g
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