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Basic Question 1 of 2
ABC shares are currently trading at $17.50 per share. The company is widely expected to retain 72% of their next year's earnings, resulting in a dividend payment of $1.25. Further research reveals that ABC has a beta of 1.3, at a time when the market risk premium is 5.2% above the risk-free rate of 3.2%. What should be leading P/E ratio for ABC if its earnings are expected to grow at 6% indefinitely?
B. 7.07.
C. 12.84.
A. 3.92.
B. 7.07.
C. 12.84.
User Contributed Comments 3
| User | Comment |
|---|---|
| Nightsurfer | Why can't you figure out expected earnings from the expected dividend payment of $1.25 and divide it into the current stock price? E1 = 1.25 / (1 - 0.72) = $4.4643 P0/E1 = $17.50 / $4.4643 = 3.95 |
| noonah | Nightsurfer, you have calculated the actual leading P/E, not the one as per GGM, as the question indicates by "what should be the leading P/E". Fundamental to GGM is the discounting by the factor (r-g). |
| davidt876 | nice noonah. and because the actual P/E is lower than the estimated P/E with GGM, we can assume that the stock price has room to grow |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
explain the growth phase, transitional phase, and maturity phase of a business;
CFA® 2026 Level II Curriculum, Volume 3, Module 21.