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P/E Ratio and Plough back ratio 1. ROE greater than r - an increase in b leads to an increase in P/E 2. ROE equal to r - an increase in b has no effect on P/E. 3. ROE less than r - an increase in b leads to decrease in P/E. P/E Ratio and interest rate 1. There is an inverse relationship between P/E Ratio and interest rate
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P/E Ratio and Risk Riskier stock have lower P/E Ratio P/E Ratio and Liquidity High liquid stock commands higher P/E Illiquid stock commands lower P/E Other Factors Size of the company Reputation of management
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= E0 (1+g)(1-b) [as D1 = E1(1-b) and E1= E0 (1+g)] rg since E0 is the product of book value per share and return on equity P0 = BV0(ROE) (1+g)(1-b) rg P0 = (ROE) (1+g)(1-b) BV0 rg
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As E0 is the product of sales per share and net profit margin P0 = S0(NPM)(1+g)(1-b) rg P0 = (NPM)(1+g)(1-b) S0 rg