CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
A company's trailing P/E is 20.0 and its payout ratio is 40%. Using the relationship between the dividend yield, P/E and payout ratio, the trailing dividend yield is closest to:
Dividend yield equals the payout ratio divided by the P/E. With a 40% payout and a P/E of 20, the yield is 0.40 divided by 20, which is 2.0%. Multiplying the two figures instead of dividing gives a wrong result.
- A2.0%Correct
- B8.0%
- C50.0%
Explanation
Dividend yield = D/P = (D/E)/(P/E) = payout ratio / P/E = 0.40/20.0 = 2.0%. The 8.0% result multiplies instead of dividing (0.40 × 20). The 50% result is 1/P/E... actually 1/20 is 5%, so 50% reflects a misplaced decimal.
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