Earnings Multiplier and Value Calculation

Explanation

The answer cannot completely be determined from the information provided. Specifically, while the appropriate earnings multiplier can be found from the given information (and it is 4.29), the correct value for the series cannot be determined without an estimation of EPS at t1. The following explains the derivation of the earnings multiplier for a stock market series.

Estimating the earnings multiplier for a stock market series requires the estimation of each of the following components:

The dividend payout ratio.

The required rate of return on common stock in the country/region/industry/sector being analyzed.

The expected growth rate of dividends for the stocks in the country/region/industry/sector being analyzed.

Once values for each of these components have been determined, they are imputed into the following formula:

P/E = [D/E / (k - g)]

Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

Had this example provided a figure for the EPS at t1, then the value of the index could be found by multiplying the EPS at t1 by the earnings multiplier.