Stock Earnings Multiplier Ratio Calculation | CFA Level 1 Exam Preparation

Calculate the Stock Earnings Multiplier Ratio for a Zero Growth Firm

Prev Question Next Question

Question

The stock of a zero growth firm has a beta of 1.3 at a time when the market premium equals 7.7% and the risk-free rate equals 5%. The firm's earnings multiplier ratio equals ________.

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

C

According to the Dividend Discount Model, P/E = payout ratio/(k-g) in standard notation. A no growth firm has a retention ratio of zero and a payout ratio of 1.

Further, g = 0 for no growth. Therefore, the P/Eratio of a no-growth firm is simply equal to the reciprocal of its required rate of return. the firm's CAPM required rate

= 5% + 1.3 * 7.7% = 15%. The earnings multiplier is therefore equal to 1/0.15 = 6.66.

Prev Question Next Question