# Calculating the PB of a stock in practice

This is a practical problem of calculating the PB of a stock. Here is a example of Jenapharm, but I am not sure which terms following can be found in Bloomberg.

Jenapharm was the most respected pharmaceutical manufacturer in East Germany.

Jenapharm, which was expected to have revenues of 230 million DM and earnings before interest and taxes of 30 million DM in 1991.

The firm had a book value of assets of 110 million DM, and a book value of equity of 58 million DM. The interest expenses in 1991 is expected to be 15 million DM. The corporate tax rate is 40%.

The firm was expected to maintain sales in its niche product, a contraceptive pill, and grow at 5% a year in the long term, primarily by expanding into the generic drug market.

The average beta of pharmaceutical firms traded on the Frankfurt Stock exchange was 1.05.

The ten-year bond rate in Germany at the time of this valuation was 7%; the risk premium for stocks over bonds is assumed to be 5.5%.

Calculate the PB:

$$\textrm{Expected Net Income} = (\textrm{EBIT} - \textrm{Interest Expense})*(1-t)$$ $$= (30 - 15) *(1-0.4) = 9$$ $$\textrm{Return on Equity} = \textrm{Expected Net Income / Book Value of Equity}$$ $$= 9 /58 = 15.52\%$$ $$\textrm{Cost on Equity} = 7\% + 1.05 (5.5\%) = 12.775\%$$ $$\textrm{Price/Book Value Ratio} = (\textrm{ROE} - g) / (r - g)$$ $$= (.1552 - .05) / (.12775 -.05) = 1.35$$

To find the data in Bloomberg, I have following questions:

1. Which risk free interest rate will we use? 10 year bond of respective currency?

2. For Risk premium for stocks over bonds and Expected Net Income, can we directly found those two terms in Company's information?

• I've never seen this approach used. Price is usually meant to mean market value, while book is usually meant to mean accounting or economic value. What I see here is fundamentally different. – David Addison Jun 14 '17 at 5:43
• You are quite right. Because Jenapharm was not stock-market listed, they are trying to find out what the market value would have been IF IT HAD BEEN LISTED on the Frankfurt exchange (which it wasn't). So it is quite a roundabout calculation with a lot of assumptions and IFs and BUTs to estimate a hypothetical market value. – noob2 Jun 14 '17 at 13:35