Earnings Multiplier of a Stock

The Earnings Multiplier of a Stock

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The earnings multiplier of a stock

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A. is determined by the expected dividend payout ratio, the return on capital, and the expected growth rate of dividends for that stock. The earnings multiplier tends to be rather stable between stocks and industries, and does not vary significantly over time.

B. is determined by the expected dividend payout ratio, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks and industries, and over time.

C. is determined by the expected earnings, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary between stocks and industries, but is rather stable over time.

D. is determined by the expected dividends, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks and industries, and over time.

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A. B. C. D.

The earnings multiplier (or price/earnings ratio) is equal to the expected dividend payout ratio, divided by the spread between the required rate of return and growth rate of dividends on the stock. Estimation of the earnings multiplier is important because it varies between stocks and industries as well as over time. It, along with future earnings, is used to estimate the future market value of stocks or stock market series.

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