Module 31.4 LOS 31.h: Relating Justified PE to Justified PS and Justified PB

From the justified PE equation we can derive several relationships to PS and PB ratios:

where:

V₀ = fundamental value

D₀ = dividend just paid

D₁ = dividends expected to be received at end of Year 1

r = required return on equity

g = dividend growth rate

We can see for example, that the P/S ratio is net profit margin x justified trailing PE.

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