Earnings multiplier model (or P/E)
P/E = current market price of stock/expected 12 month earnings per share
Using the previous formula we can rewrite the P/E as,
P/E = (D1/E1)/(k-g)
So P/E is dependent on:
Example:
If a firm has a dividend payout ratio of 70%, a required rate of return of 15% and a growth rate of 8% then what will be the estimated P/E?
Answer:
P/E = (D1/E1)/(k-g)
P/E = .70/(.15-.08)
P/E = 10.0
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