ROIC and P/E

CFA Level II FRA
#1

Hello,

I have a question regarding calculating the effect of growth en roic on the P/E ratio.
I can not post the link from the article here, but you can find it on Google: all pe’s are not created equal. It is an article from McKinsey.

It is about exhibit 1. I figured out how to calculate the PE ratio for Returns Inc. ROIC = 35%, growth = 5%, cost of capital = 10% and PE is 17.
ROIC/GROWTH RATE = 5/35 = 0,14. So 0,86 is distributable cash. cost of capital is 10 and growth rate is 5. 0,10 - 0,05 = 0,05. 0,86/0,05 = 17.

But when I want to do the same for Growth Inc there is the problem that the growth is higher than the cost of capital and therefore I get a negative number if i want to substract the growth from cost of capital. Growth Inc ROIC = 14%, growth = 13% cost of capital = 10% and PE is 17

Obviously I am doing something wrong, any wizzkids who can help me figure this out?

Thanks in advance.

#2

Cash flow every year based on 13% growth rate and investment rate = 13/14 for the first 10 years.

Then the terminal value is based on Cash flow in Year 11 (investment rate = 5/14 and growth rate = 5%)

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#5

Hi! Hopefully someone of you can read it and reply. I also try to figure out, how they calculated the fair P/E ratio.

The formula mentioned in the first posting doesnt fit to the McKinsey table.

e.g. if I use these figures:
|ROIC 25%|
|GROWTH 8%|
|COC 15%|

I end up with a P/E of 9,7.
(1-8%/25%)/(15%-8%)

If I refer to the Mc Kinsey table it should be 39,3?

So how did they calculate the 39,3 with a ROIC-COC 10% and 8% Growth?