NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A company has a share price of Rs 240, earnings per share of Rs 16 and a book value per share of Rs 80. Its dividend payout ratio is 25%. What is the price-to-earnings multiple and the implied return on equity, respectively?
The price-to-earnings multiple is 15, from Rs 240 divided by Rs 16, and the return on equity is 20%, from earnings per share of Rs 16 divided by book value per share of Rs 80. The payout ratio is not required.
- AP/E 15 and ROE 20%Correct
- BP/E 15 and ROE 5%
- CP/E 3 and ROE 20%
- DP/E 15 and ROE 0.33%
Explanation
P/E = 240/16 = 15. ROE = EPS/book value = 16/80 = 20%. Payout ratio is not needed for this. P/E 3 is the P/B (240/80). ROE 5% wrongly uses dividend or payout. 0.33% is nonsensical inversion.
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