am getting confused are the following both intrinsic PEs or what is each called P/E = 1-b/r-g P/E= I/r+ FF*GF am confusing which formuar to use when am asked to calculate intrinsic PE
The first P/E (1-b / r-g ) is the justified leading PE The second one is the intrisic PE
Spanishek - cd u check the answer to CFAI mock AM question 57 its my source of confunsion. the question asked for intrinsic PE but they used the leading PE formular thanks
If ROE=r, then either b=0 or g=0, so both are the same, because g=b ROE. So, if you are given ROE, use P/E= I/r+ FF*GF, else use P/E = 1-b/r-g. Justified P/E is is the P/E you get if you use the actual price (v0), but you use the same formula.
Audrey, the two equations you gave originally are one and the same, you can mathematically equate one to the other. Although there is confusion about the term, as it sometimes refers only to the 1/r term, without PVGO. Eg, how this 1/r term changes in the presence of inflation w/ passthrough.
To get the inflation effect easily, think like this: P/E1 = 1/r =====> that we already know. But r is nominal, so we can adjust it first (slowly) like this: P/E1 = 1/(r-inflation + inflation) =======> no change it’s the same so far. Then use lambda (the percentage of inflation that passes through): P/E1 = 1 / [(r-inflation) + (1-Lambda)* inflation] Ignore the book’s frmula.
On a related note how come intrinsic P/E is P(0)/E(1) not P(0)/E(0)???
Intrinsic PE = (1-b) / (r-g) = leading PE Intrinsic PE = Dividend Payout Ratio / (r-g) = b / (r-g) Intrinsic PE = Tangible PE + Franchise PE Intrinsic PE = 1 / (r + (1 - inflation flow thru) *Inflation)
Dreary Wrote: ------------------------------------------------------- > To get the inflation effect easily, think like > this: > > P/E1 = 1/r =====> that we already know. > > But r is nominal, so we can adjust it first > (slowly) like this: > > P/E1 = 1/(r-inflation + inflation) =======> no > change it’s the same so far. > > Then use lambda (the percentage of inflation that > passes through): > > P/E1 = 1 / [(r-inflation) + (1-Lambda)* > inflation] > > Ignore the book’s frmula. To make it even better, the final line simplifies to: P/E1 = 1 / (r - Lambda*inflation)
Dreary - the part that is confusing is that Intrinsic PE in presence of inflation ignores the FF/GF terms. Either I’m missing something, or I think it’s an oversimplication in the curriculum that assumes the company has zero FF or GF when considering inflation. Eg, without inflation, intrinsic PE is : PE = 1/r + FF * GF Now when we turn on inflation, we adjust the first 1/r term to account for inflation passthrough, but the second FF*GF term is dropped to zero. PE = 1 / (r - Lambda*inflation) Its obvious the FF/GF terms are dropped if inflation is zero, it only leaves the first term.