CFA Level I · CFA Level I Exam · Sources of Equity Returns
A stock's earnings per share rise from 4.00 to 4.40 over one year, and its P/E ratio is unchanged at 15. The stock pays no dividend. The one-year return is closest to:
The return is about 10%. With no change in the P/E ratio and no dividend, the price rises in line with earnings per share, which grew from 4.00 to 4.40, or 10%. Price moves from 60 to 66 at a constant multiple of 15.
- A5.0%
- B10.0%Correct
- C15.0%
Explanation
Price at start = 4.00 x 15 = 60.00. Price at end = 4.40 x 15 = 66.00. Return = 6/60 = 10.0%. With a constant P/E, price growth equals earnings growth of 10%. The 15% option mistakenly uses the P/E level.
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