Reading 28: Relative-Value Metho....olio Management－LOS f share, return, future, market

tycoon

CFA Institute Area 6: Economics
Session 6: Economic Concepts for Asset Valuation in Portfolio Management
Reading 24: Macroanalysis and Microvaluation of the Stock Market
LOS f: Evaluate the intrinsic value and estimated rate of return of the stock market by estimating future earnings per share and determining an appropriate earnings multiplier.

tycoon

Using an earnings multiplier approach to value the market, which of the following would NOT result in a higher P/E ratio for the market, all else equal?

A) Higher net profits.

B) Higher total asset turnover.

C) Higher Treasury bill yields.

D) Higher financial leverage.

---

Answer and Explanation

Higher Treasury bill yields would result in higher required returns which would decrease the P/E ratio for the market. Higher net profits, higher total asset turnover, and higher financial leverage would all result in a higher growth rate (using DuPont analysis), which would result in a higher P/E ratio for the market.