NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A company has a book value per share of Rs 80 and a return on equity of 15%. If its price-to-book ratio is 3, and earnings per share equals ROE times book value, what is its P/E ratio?
The P/E ratio is 20. EPS is 15% of Rs 80, which is Rs 12, and the price is 3 times book value, Rs 240; dividing 240 by 12 gives 20.
- A12
- B20Correct
- C45
- D5
Explanation
EPS = 0.15 x 80 = Rs 12. Price = 3 x 80 = Rs 240. P/E = 240 / 12 = 20. Equivalently P/B divided by ROE = 3 / 0.15 = 20.
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