If you are asked to find Intrinsic P/E, would you automatically assume it to be Po/E1 i.e. the Leading P/E value? CFAI mocks tend to do so. Can someone explain why this is the case? I mean…why can’t Po/Eo (trailing) be the intrinsic value? Many thanks!
Intrinsic P/E is also called observed P/E. Intrinsic P/E = tangible P/E (which is 1/r or P0/E0) + franchise P/E.
I think it depends on the data given and the accuracy of them. If you are given both trailing and leading EPS then I assume that since valuation is a forward-looking process you should take the leading alternative, given that you are confident. This is the most reasonable explanation I can think of.
s**t I always thought intrincis P/E was the P/E based on the gordon growth model, can someone please confirm if I am incorrect
i guess (to play safe), just find P0/E1 (leading) when CFAI asks for intrinsic P/E value…
Intrinsic P/E, as mentioned above, is calculated as: Int PE = Tangible PE + Franchise PE = 1/r + Franchise Factor*G = 1/r + (1/r - 1/ROE)(g/(r-g)) The PE found using Gordon Growth (Payout/(r-g)) is the justified P/E As far as using leading or trailing, i read in Schweser that if you have the option of both, you should lead towards the leading because investing is based on trying to understand future values and cash flows (or future investment value). Hence, use the leading if possible.
Hollar!
In explaining this issue in text, CFAI uses E1, but in EOC question it uses E0?