Practice Exams, Volume 2, Exam 3, PM, Q100 The vignette states that he used forecasted fundamentals to establish a justified P/E. This means he is referring to the leading P/E. Multiplying the leading P/E by the net profit margin - (E/S) will not produce the P/B ratio. Only the trailing will. He is wrong about the P/S. The answer states he is right. Thanks!
justified P/E * net profit margin = price/sales (he is correct) Justofoed P/E * ROE = price / book (he is correct) I had to play with this a bit to understand.
If he is using the leading P/E then he is stating the below (using leading P/E) is correct. (1-b)/r-g * E/S = P/S The equation for j P/S is (uses trailing P/E): (1-b)(1+g)/r-g * E/S
No clue what you are saying… justified P/E = (1-b)/r-g multiply by net profit margin and you get (1-b)(profit margin)/r-g this is justified price/sales (leading) multiply by ROE and you get (1-b)(roe)/r-g AKA (ROE-g)/(r-g) this is justified price / book (leading).
Look at page 242, Equity, Schweser It states there that justified P/S= net profit margin * justified trailing P/E
page 518, CFAI vol 4