{"id":202707,"date":"2025-03-18T04:05:07","date_gmt":"2025-03-18T04:05:07","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=202707"},"modified":"2025-03-18T04:05:09","modified_gmt":"2025-03-18T04:05:09","slug":"a-benchmark-pe-ratio-can-be-determined-using-2","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/03\/18\/a-benchmark-pe-ratio-can-be-determined-using-2\/","title":{"rendered":"A benchmark PE ratio can be determined using"},"content":{"rendered":"\n

A benchmark PE ratio can be determined using:<\/p>\n\n\n\n

Bank of Canada estimates the PEs of similar companies
a company’s own historical PEs
the constant-growth model<\/p>\n\n\n\n

The correct answer and explanation is :<\/strong><\/mark><\/p>\n\n\n\n

The correct answer is:<\/p>\n\n\n\n

The constant-growth model<\/strong><\/p>\n\n\n\n

Explanation:<\/h3>\n\n\n\n

The Price-to-Earnings (PE) ratio is a fundamental valuation metric used to assess whether a stock is overvalued or undervalued. A benchmark PE ratio<\/strong> represents a standard or reference point to compare a company\u2019s current PE ratio. Among the given options, the constant-growth model (Gordon Growth Model)<\/strong> is the appropriate method to determine a benchmark PE ratio.<\/p>\n\n\n\n

1. The Constant-Growth Model and PE Ratio<\/strong><\/h4>\n\n\n\n

The constant-growth dividend discount model (DDM) is given by:<\/p>\n\n\n\n

[
P_0 = \\frac{D_1}{r – g}
]<\/p>\n\n\n\n

Where:<\/p>\n\n\n\n

    \n
  • ( P_0 ) is the current stock price<\/li>\n\n\n\n
  • ( D_1 ) is the expected dividend in the next period<\/li>\n\n\n\n
  • ( r ) is the required rate of return<\/li>\n\n\n\n
  • ( g ) is the constant dividend growth rate<\/li>\n<\/ul>\n\n\n\n

    By dividing both sides by earnings per share (EPS), we get the intrinsic PE ratio<\/strong>:<\/p>\n\n\n\n

    [
    PE = \\frac{1 – b}{r – g}
    ]<\/p>\n\n\n\n

    Where ( b ) is the earnings retention ratio (1 – dividend payout ratio).<\/p>\n\n\n\n

    This equation shows how a company’s growth rate, return expectations, and dividend policies<\/strong> determine its PE ratio, making it a benchmark<\/strong> for valuation.<\/p>\n\n\n\n

    2. Why Other Options Are Incorrect<\/strong><\/h4>\n\n\n\n
      \n
    • Bank of Canada estimates the PEs of similar companies<\/strong>: This provides a relative PE comparison<\/strong>, but it does not establish a theoretical benchmark.<\/li>\n\n\n\n
    • A company’s own historical PEs<\/strong>: Past PEs reflect past market conditions and investor sentiment, but they do not determine a fair or justified PE based on fundamentals.<\/li>\n<\/ul>\n\n\n\n

      Thus, the constant-growth model<\/strong> provides the most theoretically sound benchmark for the PE ratio.<\/p>\n","protected":false},"excerpt":{"rendered":"

      A benchmark PE ratio can be determined using: Bank of Canada estimates the PEs of similar companiesa company’s own historical PEsthe constant-growth model The correct answer and explanation is : The correct answer is: The constant-growth model Explanation: The Price-to-Earnings (PE) ratio is a fundamental valuation metric used to assess whether a stock is overvalued […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-202707","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202707","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=202707"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202707\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=202707"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=202707"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=202707"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}