CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
A company has a share price of $48, earnings per share of $3.00, and a dividend payout ratio of 40%. Using the relationship between multiples, its trailing P/E and its dividend yield are closest to:
The trailing P/E is 16.0 and the dividend yield is 2.5%. P/E is $48 divided by $3.00 EPS. Dividends are 40% of EPS, or $1.20, and dividing by the $48 price gives 2.5%, which also equals payout divided by P/E.
- AP/E 16.0; dividend yield 2.5%Correct
- BP/E 16.0; dividend yield 6.3%
- CP/E 19.2; dividend yield 2.5%
Explanation
P/E = 48/3 = 16.0. Dividend per share = 0.40 × 3.00 = $1.20, so yield = 1.20/48 = 2.5%. Yield also equals payout divided by P/E: 0.40/16 = 2.5%. The 6.3% figure divides the payout ratio by 6.4, an arithmetic error; 19.2 wrongly adds 40%.
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