extrapolating G from trailing justified PE

CFA Level II Equities
#1

Hi everyone,

quick question:

how can I extract the growth rate from the trailing PE formula?

as the fomula is: payout*(1+g) / r-g

how do I extract g?

thank you very much in advance

Paolo

#2

PE=(1-b)(1+g)/(r-g)

The high school mathematical process looks like this

Take (r-g) to the other side and also open up all brackets

PE(r-g)=(1-b)(1+g) PEr-PE g =1+ g -b-b g

now collect together on one side all terms that have a “g” in them

PEr-1+b= g -b g +PE g

separate “g” from the pack

PEr-1+b= g (1-b+PE) g=(PEr-1+b)/(1-b+PE)

This looks like a mess but in the exam all other variables will be given except “g” so plug all figures into the original formula and then extract “g” as it will be easier.

#3

it’s not a mess.

great thanks.

“b” alone is the retention ratio right?

thanks

Paolo

#4

Yes. b= retention ratio and 1-b is the payout ratio