ROE Valuation Method

ROE Valuation Method

Assumptions:
1. ROE
2.
3. P/E ratio
* 1&2ROE

* P/E ratio

An Example
ROE = /
= 25%
Book per share
= 30
Cash dividend payout ratio
= 80%
Required rate of return
= 20%
P/E ratio
= 10

An Example
t
t+11
1.
t+1 t+3?
2. 40% ?

BPS: Book per share

D: Cash dividend
RE: Retained earnings

At 1st day of t+1 year:

Given BPSt+1=30
EPSt+1=7.5

Dt+1=6

EPSt+1=7.5

Dt+1=6 t+16
REt+1= 1.5 7.5 6

 At 1st day of t+2 year:

BPSt+2BPSt+1+REt+130+1.531.5
EPSt+2=7.875

Dt+2=6.3
Dt+2=6.3 t+26.3
EPSt+2=7.875
REt+2=1.575= 7.875 6.3

 At 1st day of t+3 year:

BPSt+3BPSt+2+REt+231.5+1.57533.075
EPSt+3=8.269

Dt+3=6.615
Dt+3=6.615 t+36.615
EPSt+3=8.269
REt+3=1.654=8.269-6.615

t+3
At 1st day of t+3 year:
t+3
Pt+3= EPSt+3 (P/E)= 8.269 10= 82.69

t

t+1

Dt+1=6

t+2

Dt+2=6.3

t+3

Dt+3=6.615
Pt+3=82.69

Valuet

Case 1. Under no taxes

At 1st day of t+1 year (Today):
Case 1. Under no taxes
t+161.056

R: Required rate of return () = 20%

Case 2. Under taxes situation

At 1st day of t+1 year (Today):
Case 2. Under taxes situation
t+155.775

R: Required rate of return ()=20%

t: tax rate ()= 40%
/

Homework
ROE =/= 25%
Book per share= 30
Cash Dividend payout ratio
= 50%
Required rate of return= 20%
P/E ratio = 10

t
t+11
1.
t+1 t+3
2. 20%