The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 12 percent, and the expected growth rate for dividends is 6 percent. Compute the current earnings multiple.

Question

Quizplus · Accepted Answer

The current earnings multiple can be calculated using the Dividend Discount Model (DDM) as follows:

Earnings Multiple = Price/Earnings = (Dividend per Share/Required Rate of Return - Expected Growth Rate)

Here, the dividend payout ratio is given as 65%, which means that 65% of the earnings are paid out as dividends. Therefore, the dividend per share can be calculated as:

Dividend per Share = Earnings per Share x Dividend Payout Ratio
                   = Earnings per Share x 0.65

Now, substituting the given values in the DDM equation, we get:

Earnings Multiple = Price/Earnings = (0.65 x EPS)/(0.12 - 0.06) = 10.83

Hence, the current earnings multiple is 10.83.

The Dividend Payout Ratio for the Aggregate Market Is 65