- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 3. Price to earnings: valuation based on forecasted fundamentals
CFA Practice Question
An analyst is estimating a justified P/E multiple of a company based on its fundamentals. She gathered the following fundamental factors influencing the company's justified multiple:
- Historical earnings retention rate: 38.0%.
- CAPM-based required rate of return: 8.2%.
- Expected long-term earnings growth rate: 4.5%.
What is the company's justified trailing P/E multiple?
A. 16.76
B. 17.51
C. 16.38
Explanation: Justified trailing P/E multiple = (1 - b) (1 + g) / (r - g) = (1 - 0.38) (1 + 0.045)/(0.082 - 0.045) = 17.51.
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