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Earnings Multiplier Model

# Earnings Multiplier Model - Earnings Multiplier Model P/E...

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11-1 Earnings Multiplier Model P/E Ratio: This values the stock based on expected annual earnings Price/Earnings Ratio= Earnings Multiplier Earnings Month - 12 Expected Price Market Current =

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11-2 Earnings Multiplier Model Combining the Constant DDM with the P/E ratio approach by dividing earnings on both sides of DDM formula to obtain Thus, the P/E ratio is determined by Expected dividend payout ratio Required rate of return on the stock ( k ) g k E D E P i - = 1 1 1 /
11-3 Earnings Multiplier Model Assume the following information for AGE stock (1) Dividend payout = 50% (2) Required return = 12% (3) Expected growth = 8% (4) D/E = .50 and the growth rate, g =.08. What is the stock’s P/E ratio? What if the required rate of return is 13% What if the growth rate is 9% 7 . 16 03 . / 50 . .09 - .12 .50 P/E = = = 0 . 10 05 . / 50 . .08 - .13 .50 P/E = = = 5 . 12 04 . / 50 . .08 - .12 .50 P/E = = =

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11-4 Earnings Multiplier Model In the previous example, suppose the current earnings of \$2.00 and the growth rate of 9%. What would be the estimated stock price?
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Earnings Multiplier Model - Earnings Multiplier Model P/E...

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