Price/Earnings Ratio Calculation: Examining Key Factors for Stock Market Series

Not Necessary Factors for Calculating Price/Earnings Ratio

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Question

Which of the following is not necessary to determine the price/earnings ratio for a stock market series?

Answers

A. All of these are necessary to determine the P/E ratio for a stock market series.

B. The dividend at D1.

C. The EPS figure at t1.

D. The expected growth rate of dividends.

E. The required rate of return. A

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Explanations

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A. B. C. D. E.

Explanation

All of the choices listed are components in the equation used to determine the earnings multiplier of a stock market series, as shown below:

P/E = [(D1 / E1) / (k-g)

Where: D1 = the annual per-share dividend at t1, E1 = the EPS figure at t1, k = the required rate of return on common stock, and g = the expected growth rate of dividends.

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