Emerging market valuation and P/E

CFA Level II
#1

Hi good to be back on the forums… was wondering if someone can help re P/E… In the reading re emerging market equity valuation there’s a section talking about incorporating inflation effects into P/E the formula is given as : P/E = 1 / ( r + (1 - Inflation-flow-thru rate) x Inflation rate ) -Isn’t this only valid in case all earnings are fully paid out as dividends such that : D = E ? -Where the heck did the growth rate (g) go ? -If we relax these assumptions, what happens?

#2

Still need someone’s input on this… Thanks

#3

> -Isn’t this only valid in case all earnings are > fully paid out as dividends such that : D = E ? Yep > -Where the heck did the growth rate (g) go ? Remember that g = ROE X (Retention ratio) So, if (Retention ratio) = 0, guess what g is going to be > -If we relax these assumptions, what happens? Then we would have something that is outside the scope of the CFA curricullum

#4

(Retention ratio) = 1 - (D/E) So, if D = E, then (Retention ratio) = 0

#5

thanx olivier…

#6

wow … I just finished this section last night and don’t remember seeing that formula. Guess I’m going to have to revisit tonight.

#7

its taking out the growth variable and adding an inflation adjustment… so its kind of like the intrinsic P/E with inflation effects