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when we calculate value of company through P/E ratio then why profit after tax is taken not profit after interest & tax ?
But we do use profit after interest and tax! ‘Earnings’ for the PE ratio are the earnings available for ordinary shareholders i.e. profit after interest, after tax, and after preference dividends.
If you a referring to a specific question where you think it is done differently, then post again and I will explain.
P/E ratio method is market based method for business valuation and according to this P/E=market price/earnings
and when market price have to be found then the formula will be
market price(value)=P/E* Earnings .
my question is that, which earnings will be used , profit after tax or profit after interest or tax.?But I just gave you the answer!!!!!!!
We use profit after interest, after tax, and after preference dividends.
I have a question regarding the June 2010 Q.4 part B
In that question, the second part asks us to calculate the price of the share taking in to account the change in dividend policy.
The answer has taken D1 as the year 4 dividend
But according to my understanding D1 = 70(1.03) = 72.1Could you PLEASE explain how and why the answer has taken the year 4 as D1 without considering the dividend growth?
Usually we calculate market value at time 0 using the formula D1/(re-g)
D1 is the dividend in 1 year and with constant growth is Do(1+g).Here, we are first calculating the market value in three years time, time 3. Since it is 3 years later, D1 in the formula has also to be three years later – it becomes D4 i.e. the dividend in 4 years time.
The dividend in 4 years time is the dividend in 2013 which is 70c. It is not 70c plus growth.
So putting 70c in the formula gives the market value at time 3. Then we discount for 3 years to get a market value now.
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