Does anyone understand when to use the constant growth model to calculate P/E, or to use the current price divided by normal EPS. THese are two dofferent methodes and the book does not say when ro why to use either. using the first methode you would have to sometimes calculate the growth rate or the required return of equity, or divident payout ratio. the other involves the current price/normal eps. I believe the results will give something differnet for the same stock. anyone know when to use or which one is more better in a real environment???
firstly, dont stress… have you got any questions/examples? in the exam, just look at the information thats given to you… in the real world though, im guessing take a look at the assumptions that underpin both models, and decide which assumptions you’re willing to make…
My understanding is that the measures are intended to be used in conjunction with one another. The Gordon Growth Model (single-stage DDM) is used to calculate an “intrinsic” or “justified” trailing (or leading) P/E. Then you’d calculate the current P/E using normalized earnings and compare this value to the intrinsic P/E to determine whether the stock is relatively overpriced, fairly priced, or underpriced.
that is a very good point, I see what you mean. Can you explain in more detail.