the concept makes sense, but i just saw the formulas this morning, and i don’t know why they’re calculated like they are. i don’t have the notes in front of me, but as far as i recall the numerator isn’t a price estimate of any kind… just payout rate over r-g. why is it calculated like that?
Justified Leading P/E = 1-b/r-g = D1/E1/r-g Trailing P/E (1-b) * (1+g)/r-g
There is no price estimate in the numerator becasue it is calculated from the DDM. Price = P0 = D1 / (r - g) Now, P0/E1 = (D1/E1) / (r-g) = (1 - b) / (r - g) - Justified Leading P/E D1 / E1 = 1 - b P1 / E0 = (D0*(1+g)/E0) / (r - g) = ((1 - b)*(1 + g)) / (r - g) - Justified Trailing P/E However, this is assuming constant payout ratio - D0/E0 = D1/E1 = (1 - b) Hope this helps.
it’s because the growth factor of the earnings cancel out the growth of the dividends. you’re just left with D/E which is the payout ratio