CFA Level 1: P/E Ratio Calculation

P/E Ratio Calculation

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Question

If a stock has an expected dividend payout of 50 percent, a required rate of return of 14 percent and an expected dividend growth rate of 9 percent, what is the P/

E ratio?

Answers

Explanations

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A. B. C. D.

D

The price/earnings ratio can be computed by dividing the expected dividend payout ratio (dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of dividends (g).

In this case, P/E = .50/(.14-.09) = 10

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