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?
Still need someone’s input on this… Thanks
> -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
(Retention ratio) = 1 - (D/E) So, if D = E, then (Retention ratio) = 0
wow … I just finished this section last night and don’t remember seeing that formula. Guess I’m going to have to revisit tonight.
its taking out the growth variable and adding an inflation adjustment… so its kind of like the intrinsic P/E with inflation effects