If no dividends are paid, P/E = (share price)/(earnings per share). If dividends are paid, P/E = (div/E)/(r-g). For reference, I came to this conclusion after reviewing Q100, schweser exam 1 PM.

Yes Leading P/E = (payout ratio) / (r-g) Trailing P/E = (payout ratio) * (1+g) / (r-g) payout ratio = (Div/E) so: Leading P/E = (Do/Eo) / (r-g) Trailing P/E = (D1/Eo) / (r-g)

yea i know that. what i meant was, there are problems where in the info theyll give u price, earnings, divpayout, cost of equity, and growth and ask u to find p/e. obviously if u just do price/earnings ull get a differesnt answer than if u do (d/e)/((r-g). so i was trying to understand when to use what and after doing that question i think ive realized that the simple p/e to find p/e ratio is only used when no dividents are paid. and if dividuends are paid, u have to use (d/e)/((r-g).

Yea I think the difference is in its actual P/E based on what the market is valuing it at and “Justified P/E” which is where it should be trading based on its fundamentals.

P/E = Price per share / Earnings per share by definition. This is always true regardless of what they give you . The other variations will depend on what you are looking for. Trainling? use last 12 month EPS. Leading? Use projected earnings. Justified? Use given fundamental data to figure it what the P/E should be.

yea i think u hit the nail on the head. i never really intuitively understood what justified p/e meant but now i think it just means that its what the theoretical p/e should be based on fundamentals like div payout and growth and cost of equity. simple p/e is jst price divided by earnings. its what the market tells us and it can and often is far from the justified or fundamental p/e. so a broker who talks about a value stock trading at a low p/e is talking about a stock with a small market p/e (i.e. price/earnings). concur?

Usually, they mean trailing P/E, that’s the most readily available multiple.

yea. one thing though i still dont get. if a firm doesnt pay dividends, obviously you cant use (D1/Eo) / (r-g) because that would give you $0. so you find p/e buy doing price divided by earnings. but if a firm does pay dividends, is it incorrect to do price divided by earnings to find the P/E ratio? im assuming it is incorrect because you are not incorporating the dividends.

the show NY Wrote: ------------------------------------------------------- > yea. one thing though i still dont get. > > if a firm doesnt pay dividends, obviously you cant > use (D1/Eo) / (r-g) because that would give you > $0. so you find p/e buy doing price divided by > earnings. > > but if a firm does pay dividends, is it incorrect > to do price divided by earnings to find the P/E > ratio? im assuming it is incorrect because you > are not incorporating the dividends. If you’re trying to find the “intrinsic/justified” multiple, and the firm does not pay dividends, you cannot use the DDM. You have to use some other model (FCF, market comps). If the firm does pay dividends, you can use the DDM. If a firm pays a steady dividend, then the GGM would be appropriate. Simply dividing P/E will give you the market based P/E ratio. The entire idea of this section is to compare the justified multiple with the market based P/E to determine whether or not a stock is under/overvalued.

No it is still correct to do Price divided by earnings if it has a dividend. Again its just the difference between actual and theoretical P/Es. I think you should be able to identify what they are looking for based on the question and the information they give you

not always. look at 100 of schweser exam 1pm. they ask you to ffind the P/E before and after the dividend. Before: P/E = price/earnings After: P/E = (div1/e1)/(r-g). no mention is made about intrinsic/fundamental/justified vs. market p/e. For P/E before the dividend, it’s obvious that the only option is to do price divided by earnings. But for P/E after the dividend, you’d get a different answer depending on what you used.