Future P/E ratio should be the ratio of futre price (P1) over future earnings(E1), right? Then how come it is calculated as P0/E1 but not P1/E1? P0/E1 = (D1/E1)/(k-g)
No one cares about FV in finance – it’s always pv’d back to today’s dollars so we can compare apples-to-apples.
But P0 is not P1 PVd to today’s value because PV of P1 = P1/(1+k) but P0 = P1/(1+g)
PassPass, now that you’ve mentioned this, I’m curious what others have to say. CFAI equips us to calculate these but I honestly don’t recall them requiring us to understand the derivation or use them beyond determining whether a stock is relatively over- or under-priced. Let’s at least review the equations we’re taught by CFAI. Justified trailing P/E = P0/E0 = (D1/E0)/(k-g) = (1-b)(1+g)/(k-g) Justified leading P/E = P0/E1 = (D1/E1)/(k-g) = (1-b)/(k-g) Where “b” is the earnings retention rate. Notice that if earnings are expected to increase, the leading P/E will be lower than trailing P/E unless price increases proportionally. Wiki presents a decent discussion of P/E: http://en.wikipedia.org/wiki/PE_ratio While I was trying to find the answer to your question, I came across this paper written by Nicholas Molodovsky which appears to offer insight, but I haven’t had a chance to finish reading it yet (URL is long so I’ve pasted onto two lines). http://www.cfapubs.org/doi/pdf/10.2469/faj.v51.n1.1856? prevSearch=%24%7BresultBean.text%7D Anyway, I’m looking forward to other’s comments while I finish this article and possibly scrounge up some other sources.