Justified multiple

The multiple a share warrants given its own fundamentals — for a forward P/E, the payout ratio over the required return less growth. The benchmark the market multiple is tested against.

Where you will meet it

Justified multiple appears in 9 learning outcomes on the CFA syllabus. A few of them:

• Tell apart valuation by comparables and valuation by forecasted fundamentals
  CFA Level I · Equity Investments

  “The method of forecasted fundamentals instead derives the multiple a firm should command from its own expected growth, payout and required return, for example a justified forward P/E of payout ratio / (r - g).”

• Derive justified leading and trailing P/Es from the Gordon growth model and explain what they mean
  CFA Level II · Equities

  “Dividing the constant-growth model by earnings gives the justified P/E.”

• Contrast comparables with forecasted fundamentals as ways of applying price multiples when valuing, and set out the economic logic behind each
  CFA Level II · Equities

  “The method based on forecasted fundamentals derives a justified multiple from a discounted cash flow model, for example the leading P/E from payout, required return and growth; its rationale is that value depends on the company's own expected cash flows and risk.”

• Work out a justified price multiple and explain what it means
  CFA Level II · Equities

  “A justified multiple is the multiple a share should trade on given its fundamentals, found by dividing a discounted cash flow value by the relevant per-share measure.”

See also

Forward p/e · Payout ratio · Required return

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with J · Glossary