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- Earnings multiplier model derived from the dividend discount model, indicate market assessment of a company's earnings to their current stock price.
- The dividend payout ratio, expected growth rate and the required rate of return are the key factors affecting the earnings multiplier of a common stock.
- Direction of Change Approach and Specific Estimate Approach are the two basic methodologies for estimating the earning multiplier.
- The required rate of return is affected by the real risk free rate, rate of inflation and risk premium on the investment.
- Under Specific estimate approach, the required rate of return is estimated by adjusting the interest rate on government bonds to high, medium, and low risk premiums.