USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 9.5. Calculate the P/E multiple.
A) 35
B) 30
C) 25
D) 20
E) 15

Question

Quizplus · Accepted Answer

The P/E multiple can be calculated using the formula: P/E = (Dividend Payout Ratio) / (Required Rate of Return - Growth Rate). First, calculate the growth rate using the formula: Growth Rate = (1 - Dividend Payout Ratio) * (Profit Margin * Total Asset Turnover * Financial Leverage). Here, Growth Rate = (1 - 0.75) * (0.15 * 2 * 1.2) = 0.09. Then, P/E = 0.75 / (0.14 - 0.09) = 15.