{"id":202728,"date":"2025-03-18T04:54:09","date_gmt":"2025-03-18T04:54:09","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=202728"},"modified":"2025-03-18T04:54:11","modified_gmt":"2025-03-18T04:54:11","slug":"a-benchmark-pe-ratio-can-be-determined-using-3","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/03\/18\/a-benchmark-pe-ratio-can-be-determined-using-3\/","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

A benchmark Price-to-Earnings (PE) ratio can be determined using the constant-growth model<\/strong>, also known as the Gordon Growth Model (GGM). This model helps estimate the intrinsic value of a stock based on its expected dividends, required return, and growth rate. The formula is:<\/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 ) = stock price<\/li>\n\n\n\n
  • ( D_1 ) = expected dividend next year<\/li>\n\n\n\n
  • ( r ) = required rate of return<\/li>\n\n\n\n
  • ( g ) = constant dividend growth rate<\/li>\n<\/ul>\n\n\n\n

    To derive the PE ratio, we divide both sides by earnings per share (EPS):<\/p>\n\n\n\n

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

    where ( b ) is the retention ratio (portion of earnings retained). This equation shows that the PE ratio depends on the required return and growth expectations.<\/p>\n\n\n\n

    Why Not Other Options?<\/h3>\n\n\n\n
      \n
    1. Bank of Canada estimates the PEs of similar companies<\/strong><\/li>\n<\/ol>\n\n\n\n
        \n
      • While industry comparisons are useful for relative valuation, they do not determine a benchmark PE based on fundamental financial principles. Different firms have unique risks and growth expectations.<\/li>\n<\/ul>\n\n\n\n
          \n
        1. A company’s own historical PEs<\/strong><\/li>\n<\/ol>\n\n\n\n
            \n
          • Past PE ratios provide insight into valuation trends but do not set a benchmark. Market conditions, interest rates, and growth expectations change over time, making historical PEs unreliable for future valuation.<\/li>\n<\/ul>\n\n\n\n

            Conclusion<\/h3>\n\n\n\n

            The constant-growth model provides a theoretical and forward-looking approach to estimating a benchmark PE ratio based on expected returns and growth. It helps investors assess whether a stock is overvalued or undervalued relative to its fundamental characteristics.<\/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 A benchmark Price-to-Earnings (PE) ratio can be determined using the constant-growth model, also known as the Gordon […]<\/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-202728","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202728","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=202728"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202728\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=202728"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=202728"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=202728"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}