Heads-Up6: Trailing and leading P/E multiple

…easy, but it could get you if you are not prepared.

A stock has a payout ratio of 40%. The shareholders require a return of 11% on their investment, and the expected growth rate in dividends is 5%. Calculate the trailing and leading P/E multiple based on these forecasted fundamentals.

.4/ (.11-.05) = 6.67 leading, 6.67 (1.05) = 7 trailing?

That’s right…just be able to derive the formulas on the fly…try not to memorize them.