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Derive Price Earning (PE) ratio as a function of ROIC (Return on Invested Capital) KIndly derive...

Derive Price Earning (PE) ratio as a function of ROIC (Return on Invested Capital)

KIndly derive with formulas.

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Answer #1

P/E = Market value per share/Earnings per share

Now Earnings Per share(EPS)= (Net income-divided)/Total no.of outstanding shares

And ROIC= (Net income-dividend)/Total Capital

so from this we can say that (Net income-dividend) = ROIC*Total Capital

so now replace this in EPS equation we get EPS=(ROIC*Total Capital)/Total No.of outstanding shares

Now replace in PE ratio formula

we get PE ratio= Market value per share/Earnings per share

=Market value per share/(ROIC*Total Capital)/Total No.of outstanding shares

By re arranging we get Price Earning (PE) ratio as a function of ROIC (Return on Invested Capital)

PE ratio= (Market value per share*Total No.of outstanding shares)/(ROIC*Total Capital)

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