P/E calculation

CFA Level I Equities
#1

At the beginning of the year,a company’s book value per share is $8.5,and its return on equity is 12%; at the end of the year,the company’s book value per share is $12.5,and its ROE is 15%.The stock price is 37.5What is the company’s P/E ratio?

Ans 22.22

Solution

37.5/[12.5 (15% + 12%)/2]

i dont get this!!!

#2

Hi do you think here we need to have dividend payout ratio or retention rate.

#3

yeah…no dividend payout ration

#4

:o

what is this question? I didnt get it !!

where did you find this mokpokpo?

S2000magician? Your views?

#5

I would think… since EPS = Book Value * ROE

So EPS=12.5 * 15%

So P/E = 37.5 / (12.5 * 15%) = 20

#6

I think there is a “2” missing in your solution…please double check. I will rationalise it as follows…

We can loosely say Return = Earnings / Outlay, ==> Earnings = Outlay x Return …which translates to …

Earnings = BV x ROE, dividing through by share(S) and calling “BV / S” as “BVS” gives: EPS = BVS x ROE.

Now using the average ROE will give: EPS = BVS x (start ROE + end ROE)/2.

Substituting the EPS in the usual P/E ratio = P/S / EPS, and replacing values we should get:

P/E ratio = 37.5 / [12.5 x (12% + 15%) / 2] = 22.22

Hope this helps, let me know if you have any queries.

#7

there was two missing

#8

thanks really helps

#9

am okay now