Hi all,

Quick question, I am doing this excercise that asks for the forward earning multiplier

Stock beta: 1.1

Risk free rate: 5%

Market risk premium expected to be 8%

ROE expected to be constant at 18% and dividend payout ratio fairly constant at 40%

So they solve as follows:

Requeired return first: 5%+1.1 (8%)=13.8%

Sustainable growth: 18% (1-0.4)=10.8

All of that is clear.

Now, when they solve for the multiplier they do:

Po/E1= 0.40/13.8%-10.8%

Do we use the payout ration on the numerator to find out forward multiplier?

Thank you very much for your time

The Owl