Assignment on

Derivation of Justified P/E, P/BV, P/S

Submitted To:
Dr. Gazi Mohammad Hasan Jamil
Professor
Department of Finance
University of Dhaka

Submitted By
Monmoth Dutta
MPF –ID-09-19-002
Justified P/E Multiple

The justified P/E price multiple is a P/E ratio with the “P” in the numerator equal to the fundamental
value derived from a valuation model

V0= D0(1+g)/(Ke-g) =D1/(ke-g)

Where V0= Fundamental Value

D0 = dividend just paid

D1 = dividends expected to be received at end of Year 1

Ke = required return on equity

g = dividend growth rate

If we express D0 as the product of current earnings per share (E0 ) and the payout ratio (D0 / E0 )
and express the retention rate as b, the previous formula becomes trailing P/E:

Justified trailing P/E, P0/E0=D0*(1+g)/E0/Ke-g

=(1-b)*(1+G)/Ke-g

Recognizing that E1 = E0 (1 + g) and D1 = D0 (1 + g), the leading P/E is calculated as:

P/E=P0/E1= D1/E1/Ke-g

=1-b/Ke-g

Justified P/B Multiple

We know sustainable growth relation of g = ROE × b and observing that E1 = B0 × ROE

Justified P/B ratio=ROE-g/ Ke-g

Where: ROE = return on equity

Ke = required return on equity

g = expected growth rate in dividends and earnings

P0/B0=D1/Ke-g*ROE/E1

=E1*DPR/ke-g*ROE/E1

=1-RR/Ke-g *ROE/1
=ROE-g/Ke-g

Justified P/S Multiple

Since net profit margin (PM0 ) is equal to E0 /S0 then

Justified P0/S0=(E0/S0)*(1-b)*(1+g)/ke-g

. g= retention ratio * net profit margin*(Sales/asset)*(asset/shareholders equity)

justified P0/S0= (E0/S0)*((1-b)*(1+g)/ke-g)

=net profit margin *Justified Trailing P/E