September 2012
Intermediate to advanced
216 pages
5h 59m
English
Content preview from Financial Times Guide to Corporate Valuation, The, 2nd Edition
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8
How to value your company in practice – an example 155
Implied price to earnings (P/E)
The price to earnings ratio is calculated as:
where P = the payout ratio, C
E
is the cost of equity and g is the long-term
growth rate.
Since C
E
and g were given from our DCF valuation and we have already
calculated the payout ratio we just insert the numbers:
price/earnings =
0.5196
––––––––––––
0.118–0.05
= 7.64
Similarly to our ROC and ROE checks, the implied long-term P/E ratio of
7.64 may appear low. Considering that the company is currently trading
at a P/E of 18 and that the industry average is slightly lower at 16.5, a 7.64
P/E ratio in the long run ...
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