Estimating a Company's Earnings Multiplier using Microanalysis Approach | CFA® Level 1 Test Prep

Microanalysis Approach to Estimating a Company's Earnings Multiplier

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Question

Using the microanalysis approach to estimating a company's earnings multiplier, the multiplier is based on:

I. the dividend payout ratio -

II. the required rate of return -

III. the company's relationship to the industry

IV. the rate of growth -

V. the estimated earnings per share

VI. the company's relationship to the market

Answers

A. III, VI

B. I, II, III, IV, V

C. I, II, IV

D. I, II, III

E. II, III, IV C

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Explanations

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A. B. C. D. E.

Explanation

The earnings multiplier, under the microanalysis approach, is estimated based on its three components: the dividend payout ratio, the required rate of return, and the rate of growth. Under the Macroanalysis approach, it is estimated from the relationships among the firm, its industry and the market. The estimates derived from each approach are resolved to settle on one estimate.

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