- 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**

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.

B. 4.5

C. 9.0

A. 3.0

B. 4.5

C. 9.0

Correct Answer: C

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**User Contributed Comments**
3

User |
Comment |
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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 |