Expected Earnings Multiplier Calculation for International Textile Company

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The earnings multiplier for this company is found as 22.45, thus none of the answers is correct.

To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company, use the following formula:

P/E = [(d1 / e1) / (k - g)]

Where: P/E = the earnings multiplier,d1 / e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated future growth rate.

In this example, all of the necessary information has been provided, and the calculation of the earnings multiplier is as follows:

In this example, all of the necessary information has been provided, but some rearranging is necessary. Specifically, the dividend payout ratio must be determined. This figure is found as follows:

Dividend payout ratio = [$1.10 / $2.45] = 0.44898, or 44.90%

Now that the dividend payout ratio has been determined, we can solve for the appropriate earnings multiplier. The calculation of this figure is found as follows:

P/E = [0.4490 / (0.11 - 0.09] = 22.45

This is likely a realistic multiple for a company within the international textile sector.