James Clinton, a portfolio manager with Middle Road Investment Advisors, is trying to estimate the appropriate earnings multiplier for the automobile industry. In his analysis, James examines the expected growth rate of dividends for the industry, as well as the expected dividend payout ratio and required rate of return.
From this information, James proceeds toward an estimation of the earnings multiplier for the series.
Which of the following best describes this method of estimating an earnings multiplier for an industry?
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A. B. C. D. E. F.A
The answer called for in this question is "microanalysis." This method involves an examination of the components of the earnings multiplier, including the anticipated growth rate of dividends, the required rate of return, and the dividend payout ratio. Once these variables have been examined, both from the perspective of trend analysis and point estimation, a value for the earnings multiplier is deduced.
Microanalysis is contrasted by macroanalysis, which involves an examination of the relationship between the earnings multiplier of a stock market series and the earnings multiplier of the overall market. For example, an individual projecting an earnings multiplier for a software index using macroanalysis would begin by examining the relationship between the P/E ratio of the software index and the P/E ratio of a broad market index such as the Standard & Poors 500. Both historical trends and point estimates would be examined, and from this information, a projection of the earnings multiplier for the stock market series is deduced.
Input-output analysis is used in the examination of competitive forces within an industry. The arbitrage pricing model is a security valuation model which allows for several relevant "situation specific" variables. Finally, the "specific estimate" and "rate of change" approaches are used to estimate the earnings multiplier of a stock market series, rather than an industry.